SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)
[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

For the fiscal year ended June 30, 2001
                                                        OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from                to
                               --------------    ---------

                           Commission File No. 0-22287

                      CUMBERLAND MOUNTAIN BANCSHARES, INC.
                      ------------------------------------
                 (Name of Small Business Issuer in Its Charter)

             TENNESSEE                                          31-1499488
--------------------------------                             -------------------
(State or other jurisdiction of                                (I.R.S. Employer
incorporation or organization)                               Identification No.)

1431 CUMBERLAND AVENUE, MIDDLESBORO, KENTUCKY                      40965
---------------------------------------------                     ----------
  (Address of principal executive offices)                        (Zip Code)

          Issuer's telephone number, including area code (606) 248-4584
                                                         --------------

           Securities registered under Section 12(b) of the Act: NONE
                                                                 ----

              Securities registered under Section 12(g) of the Act:
                     COMMON STOCK, PAR VALUE $0.01 PER SHARE
                     ---------------------------------------
                                (Title of Class)

     Check  whether  the issuer:  (l) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports);  and (2)
has been  subject to such  filing  requirements  for the past 90 days.
YES   X     NO
   ------     -------

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B in this form,  and no disclosure  will be contained to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

     State issuer's revenues for its most recent fiscal year: $9.5 million.

     The aggregate market value of the voting stock held by nonaffiliates of the
registrant  based on the last sale of which the registrant was aware ($13.75 per
share),  was  approximately  $6.9 million as of September  26, 2001.  Solely for
purposes of this calculation,  the term "affiliate"  refers to all directors and
executive  officers of the registrant and all stockholders  beneficially  owning
more than 10% of the registrant's common stock.

     As of September 26, 2001, there were issued and outstanding  679,620 shares
of the registrant's common stock.

     Transitional Small Business  Disclosure Format (check one):
YES      NO X
   ----    ----

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None.

<PAGE>
                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

     CUMBERLAND MOUNTAIN BANCSHARES,  INC. Cumberland Mountain Bancshares,  Inc.
(the  "Company") is the holding company for  Middlesboro  Federal Bank,  Federal
Savings Bank ("Middlesboro Federal" or the "Bank"). The Company was organized on
December 13, 1996 at the direction of the Board of Directors of the Bank for the
purpose of holding all of the capital stock of the Bank. On March 31, 1997,  the
Company  completed its initial public  offering.  A total of 439,731 shares were
sold in a subscription  offering in connection with the conversion of Cumberland
Mountain Bancshares,  M.H.C. (the "Mutual Holding Company") from mutual to stock
form  and  the  reorganization  of the  Bank  as a  subsidiary  of  the  Company
(collectively,  the  "Conversion  and  Reorganization").  An additional  239,069
shares were issued to the public  stockholders of the Bank in exchange for their
shares of the common  stock of the Bank.  Shares of the common stock of the Bank
that had been held by the Mutual Holding Company were canceled.  The Company has
no significant  assets other than all of the outstanding shares of the Bank, and
the portion of the net proceeds from the offering  retained by the Company,  and
the Company has no significant  liabilities  other than the debt incurred by the
Company's Employee Stock Ownership Plan.  Management of the Company and the Bank
are substantially  similar and the Company neither owns nor leases any property,
but instead uses the premises, equipment and furniture of the Bank.

     The Company is a unitary  savings and loan  holding  company  which,  under
existing  laws,  would  generally  not be  restricted as to the type of business
activities  in which it may engage,  provided  that  continues to be a qualified
thrift  lender  ("QTL").  See  "Regulation  --  Regulation of the Company" for a
description of certain regulations applicable to the Company.

     The Company's  principal  executive office is located at the home office of
the  Bank  at 1431  Cumberland  Avenue,  Middlesboro,  Kentucky  40965,  and its
telephone number is (606) 248-4584.

     MIDDLESBORO  FEDERAL BANK, FEDERAL SAVINGS BANK.  Middlesboro  Federal is a
federally  chartered  stock  savings  bank  that  was  organized  in  1994  as a
subsidiary  of the Mutual  Holding  Company.  Prior to that  date,  the Bank had
operated  since 1915 in  Middlesboro,  Kentucky  and since  1976 in  Cumberland,
Kentucky.

     Middlesboro  Federal is primarily  engaged in attracting  deposits from the
general public through its offices and using those and other  available  sources
of funds to originate loans secured by single-family  residences  located in the
counties where its offices are located. Such loans amounted to $65.6 million, or
65.64%,  of Middlesboro  Federal's total loan portfolio  (before net items).  At
June 30, 2001,  Middlesboro Federal held $18.3 million in commercial real estate
loans at that date,  representing  18.33% of total loans (before net items). The
other  significant  areas  of  lending  activity  by  Middlesboro   Federal  are
multi-family real estate loans,  construction  loans,  commercial business loans
and consumer loans which, as of June 30, 2001,  represented  $805,000,  or .81%,
$1,449 million,  or 1.44%, $6.7 million, or 6.74%, and $7.034 million, or 7.04%,
respectively, of Middlesboro Federal's total loan portfolio. Middlesboro Federal
also  makes  substantial  investments  in United  States  Treasury  and  federal
government  obligations  and  mortgage-backed  securities  which are  insured by
federal  agencies.  As of June 30, 2001, the carrying value of U.S. Treasury and
government  agency  securities  was $747 million and the  carrying  value of its
mortgage-backed securities portfolio, was $1.143 million.

     Middlesboro  Federal is subject to  regulation  by the OTS,  as its primary
federal  regulator and by the Federal Deposit  Insurance  Corporation  ("FDIC"),
which, through the Savings Association  Insurance Fund ("SAIF")  administered by
it, insures Middlesboro Federal's deposits up to applicable limits.  Middlesboro
Federal is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati,  which
is one of the 12 banks which comprise the FHLB System.

     Middlesboro   Federal's   principal  executive  offices  are  located  1431
Cumberland  Avenue,  Middlesboro,  Kentucky,  40965, and its telephone number is
(606) 248-4584.


                                       2
<PAGE>
MARKET AREA

     The Bank  considers  its  primary  market  area for its lending and deposit
services to be Bell and Harlan Counties in southeastern Kentucky and Knox County
in east  Tennessee  where its  branches  are located and the nearby  counties of
Claiborne and Union in upper east  Tennessee and western Lee County in Virginia.
The Bank's  immediate  market areas of Bell and Harlan  Counties in Kentucky and
Claiborne  County in Tennessee are  predominately  rural and lightly  populated.
Bell  and  Harlan  Counties  were  severely  impacted  by  the  decline  of  the
coal-mining  industry  in the  1980s  which  was  formerly  the  area's  largest
employer. According to 1990 Census figures, 35.9% and 32.3% of the households in
Bell and Harlan  Counties,  respectively,  were below the federal  poverty line.
Between 1980 and 1990,  the  population of Bell County  declined by 8.2% and the
population of Harlan County declined by 12.7%.  The median  household  income in
Bell County was  estimated  to be $14,819 in 1996  ranking  the county  110th in
Kentucky in terms of household  income.  Harlan County,  with a median household
income of $16,137,  was ranked 102nd. The 1994 unemployment rate for Bell County
was  7.9%.  In terms of  employment,  the  largest  industry  in Bell  County is
currently  health  services.  The  largest  single  employer in Bell County is a
pork-processing  plant.  Coal  mining  remains  the  largest  employer in Harlan
County. Knox and Union Counties in Tennessee have more diversified economies and
higher income levels than the Bank's  immediate  market area,  reflecting  those
counties' proximity to Knoxville, the nearest population center.

LENDING ACTIVITIES

     GENERAL.  The  Bank's  primary  lending  activity  is  the  origination  of
conventional  mortgage  loans for the  purpose of  constructing,  purchasing  or
refinancing  owner-occupied,  one- to four-family  residential properties in its
primary  market  area.  At June 30, 2001,  one- to  four-family  mortgage  loans
comprised $65.6 million,  or 65.64%,  of the Bank's gross loan  portfolio.  To a
lesser extent, the Bank originates construction loans,  multi-family residential
and  commercial  real  estate  loans  and has  purchased  whole  loans  and loan
participations to supplement its originations.  The Bank also originates secured
and unsecured commercial and consumer loans.

     During  recent  years,   the  Bank  has  expanded  the  loan  portfolio  by
emphasizing  originations  in its  primary  market  areas  of  Bell  and  Harlan
Counties,  Kentucky  and  Claiborne,  Knox  and  Union  counties  in  Tennessee.
Management  has also sought to diversify the loan  portfolio  through  increased
origination of commercial  mortgages and commercial loans. A significant portion
of the  Bank's  loan  growth  in recent  years has  involved  loans  secured  by
properties in Knox County, Tennessee. Middlesboro Federal estimates that at June
30, 2001 its portfolio included  approximately $18.3 million in loans secured by
properties in Knox County.

                                       3
<PAGE>
     Set forth below is selected data relating to the  composition of the Bank's
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
                                                                           AT JUNE 30,
                                                          ---------------------------------------------------
                                                                    2001                        2000
                                                          --------------------          ---------------------
                                                          AMOUNT          %             AMOUNT            %
                                                          ------       -------          ------          -----
                                                                       (DOLLARS IN THOUSANDS)
<S>                                                       <C>          <C>              <C>             <C>
Mortgage Loans:
   One- to four-family.................................   $  65,592    65.64%           $   68,479      61.51%
   Multi-family........................................         805      .81                   879       0.79
   Commercial..........................................      18,313    18.33                18,584      16.69
Construction:
   One- to four-family.................................         898      .89                 2,078       1.87
   Multi-family and commercial.........................         551      .55                 1,397       1.26
Commercial.............................................       6,737     6.74                 7,752       6.96
Consumer loans:
   Savings account.....................................       1,709     1.71                 1,996       1.79
   Automobile..........................................       1,902     1.90                 3,032       2.72
   Credit card.........................................         575      .58                   650       0.58
   Other ..............................................       2,848     2.85                 6,490       5.83
                                                          ---------    -----            ----------      -----
        Total loans....................................      99,930   100.00%              111,337     100.00%
                                                                      ======                           ======
Less:
   Loans in process....................................         (64)                          (694)
   Discounts...........................................          (1)                            (1)
   Allowance for loan losses...........................      (1,036)                        (1,032)
                                                          ---------                     ----------
     Total.............................................   $  98,829                     $  109,610
                                                          =========                     ==========
</TABLE>
     LOAN MATURITY SCHEDULE.  The following table sets forth certain information
at June 30, 2001  regarding  the dollar  amount of loans  maturing in the Bank's
portfolio  based on their  contractual  terms to maturity,  including  scheduled
repayments  of  principal.  Demand  loans,  loans  having no stated  schedule of
repayments  and no stated  maturity,  and  overdrafts are reported as due in one
year or less.  The table does not include  any  estimate  of  prepayments  which
significantly  shorten the average life of all mortgage  loans and may cause the
Bank's repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
                                                              DUE AFTER
                                       DUE DURING             1 THROUGH             DUE AFTER
                                     THE YEAR ENDING        5 YEARS AFTER         5 YEARS AFTER
                                      JUNE 30, 2002         JUNE 30, 2002         JUNE 30, 2002           TOTAL
                                      -------------         -------------         -------------         -------
                                                           (IN THOUSANDS)
<S>                                    <C>                    <C>                   <C>                <C>
Real estate mortgage loans.............$    5,671             $  17,530             $  63,254          $ 86,455
Construction...........................        --                    --                    --                --
Commercial.............................     3,203                 2,524                   726             6,453
Consumer loans.........................     3,836                 2,678                   508             7,022
                                       ----------             ---------             ---------          --------
     Total.............................$   12,710             $  22,732             $  64,488          $ 99,930
                                       ==========             =========             =========          ========
</TABLE>
     The next table sets forth at June 30,  2001 the dollar  amount of all loans
due one year or more after June 30, 2001 which have predetermined interest rates
and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
                                                        PREDETERMINED                 FLOATING OR
                                                            RATES                 ADJUSTABLE RATES
                                                        -------------             ----------------
                                                                      (IN THOUSANDS)
<S>                                                     <C>                         <C>
Real estate mortgage loans...........................   $   17,411                  $   63,373
Construction.........................................           --                          --
Commercial...........................................          971                       2,278
Consumer loans.......................................        2,251                         936
                                                        ----------                  ----------
     Total...........................................   $   20,633                  $   66,587
                                                        ==========                  ==========
</TABLE>
                                       4
<PAGE>
     Scheduled  contractual  principal  repayments  of loans do not  necessarily
reflect the actual life of such assets.  The average life of long-term  loans is
substantially less than their contractual terms due to prepayments. In addition,
due-on-sale  clauses  in  mortgage  loans  generally  give the Bank the right to
declare a  conventional  loan due and payable in the event,  among other things,
that a borrower sells the real property  subject to the mortgage and the loan is
not repaid.  The average life of mortgage  loans tends to increase  when current
mortgage  loan  market  rates are  substantially  higher  than rates on existing
mortgage loans and tends to decrease when current mortgage loan market rates are
substantially lower than rates on existing mortgage loans.

     ONE- TO FOUR-FAMILY  REAL ESTATE LOANS. The Bank's primary lending activity
consists  of the  origination  of  loans  secured  by  owner-occupied,  one-  to
four-family  residential  properties located in its primary market area. At June
30, 2001, $65.6 million,  or 65.64%,  of the Bank's loan portfolio  consisted of
loans  secured by one- to  four-family  residential  properties  of which  $63.4
million,  or  approximately  96.6% carried  adjustable  interest rates. The Bank
estimates that the average size of the  residential  mortgages that it currently
originates is $60,000.

     The Bank  originates  both  fixed-rate  mortgage loans and  adjustable-rate
mortgage loans ("ARMs").  Fixed-rate  mortgage loans are originated for terms of
up to 15 or 20 years.  ARMs are  originated  for  terms of up to 30  years.  The
Bank's one and  three-year  ARMs have  interest  rates that adjust every one and
three years,  respectively,  with a maximum  adjustment of two percentage points
for any adjustment  period and up to six percentage  points over the life of the
loan.  These loans are indexed to the weekly  average  rate on the  one-year and
three-year  U.S.  Treasury  securities,  respectively,  adjusted  to a  constant
maturity. The current margin is three percentage points. Substantially all loans
originated  by the Bank are retained in the Bank's loan  portfolio.  At June 30,
2001,  35.5% of the Bank's loans had  remaining  terms to maturity of 5 years or
less.

     The Bank's lending policies generally limit the maximum loan-to-value ratio
on residential mortgage loans to a maximum of 89% of the lesser of the appraised
value of the  underlying  property or its  purchase  price.  For loans where the
loan-to-value  ratio exceeds 80%, the Bank charges an additional amount equal to
the incremental cost of private mortgage insurance.  Such additional amounts are
added to the Bank's loan loss reserve.  Originated loans in the Bank's portfolio
include due-on-sale clauses which provide the Bank with the contractual right to
deem the  loan  immediately  due and  payable  in the  event  that the  borrower
transfers ownership of the property without the Bank's consent.

     The  retention  of ARMs in portfolio  helps  reduce the Bank's  exposure to
increases in interest rates.  There are,  however,  unquantifiable  credit risks
resulting from potential  increased  costs to the borrower as a result of upward
repricing of ARMs. It is possible that during periods of rising  interest rates,
the risk of  default  on ARMs  may  increase  due to the  upward  adjustment  of
interest  costs to the  borrower.  The Bank does not  originate  ARM loans which
provide for negative amortization.  Although ARMs allow the Bank to increase the
sensitivity of its asset base to changes in interest  rates,  the extent of this
interest  sensitivity  is limited by the  periodic and  lifetime  interest  rate
ceilings contained in ARM contracts.  In addition,  since ARM interest rates can
be  adjusted  no more  frequently  than  annually,  the yield on the  Bank's ARM
portfolio  does not  adjust as rapidly as market  interest  rates.  Accordingly,
there  can  be  no  assurance  that  yields  on  the  Bank's  ARMs  will  adjust
sufficiently to compensate for increases in its cost of funds.

     SECOND MORTGAGES AND HOME EQUITY LINES OF CREDIT.  The Bank also originates
second  mortgage  loans  and home  equity  lines of credit  exclusively  for its
existing  one- to  four-family  first  mortgage  customers.  At June  30,  2001,
$761,190,  or .76%, of the Bank's loan  portfolio  consisted of second  mortgage
loans and home  equity  lines of credit.  Second  mortgage  loans are  generally
underwritten  on a  fixed-rate  basis with terms of up to 15 years and are fully
amortizing over the term of the loan.  Second mortgages and home equity lines of
credit  are  generally  subject  to an 80%  combined  loan-to-value  limitation,
including all other outstanding mortgages or liens. Generally,  the minimum loan
amount for a second  mortgage  is $5,000.  Home  equity  lines of credit  permit
borrowers to borrow up to a  pre-established  limit during the five year term of
the line of credit.  Payments of interest only are required during the term with
a balloon  payment of all  outstanding  principal  due at maturity.  Home equity
lines of credit are  underwritten on a variable-rate  basis indexed to the prime
rate plus an increment.

     COMMERCIAL  AND  MULTI-FAMILY  RESIDENTIAL  REAL ESTATE LOANS.  At June 30,
2001, loans secured by commercial real estate and multi-family  residential real
estate  properties  totaled  $18.3  million  and  $805,000,

                                       5
<PAGE>
respectively,  and represented 18.33% and .81%,  respectively of the Bank's loan
portfolio.  Commercial real estate loans are secured by churches, motels, office
buildings,  retail  stores,  small  shopping  centers and other  non-residential
property.  At June 30, 2001,  the Bank's  largest  outstanding  commercial  real
estate loan was a $1.1 million loan secured by an oil distributorship  property.
The Bank's multi-family residential real estate loans are secured by residential
property with up to 24 units.  Substantially  all of the Bank's  commercial  and
multi-family  residential  and  commercial  real  estate  loans are  secured  by
property  located  within the Bank's market area and were current and performing
at June 30, 2001.

     Commercial and  multi-family  residential  real estate loans generally have
terms  of  up  to  15  years  and  are   underwritten   on  either  a  fixed  or
adjustable-rate  basis.  Commercial and multi-family real estate loans are fully
amortizing   over  the  term  of  the  loan.   Adjustable-rate   commercial  and
multi-family  mortgages are indexed to the prime rate and adjust on a monthly or
annual basis.  Loan-to-value ratios may not exceed 75% of the appraised value of
the underlying  property.  Commercial real estate loans which are secured by raw
land are  limited  to a maximum  loan-to-value  ratio of 65%.  It is the  Bank's
policy to obtain personal  guarantees from all principals  obtaining  commercial
and  multi-family  real estate loans. In assessing the value of such guarantees,
the Bank reviews the individuals' personal financial statements, credit reports,
tax returns and other financial information.  Generally, the Bank also obtains a
security interest in any related personal  property and a standby  assignment of
rents and leases.

     Multi-family  and  commercial  real  estate  lending  entails   significant
additional risks compared to residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related  borrowers.
The payment  experience on such loans  typically is dependent on the  successful
operation of the real estate project.  These risks can be significantly affected
by supply and demand  conditions in the market for office and retail space, and,
as such, may be subject to a greater extent to adverse conditions in the economy
generally.  To minimize  these  risks,  the Bank  generally  limits this type of
lending  to its  market  area and to  borrowers  with  which it has  substantial
experience or who are otherwise well known to management.

     With certain limited exceptions,  the maximum amount that the Bank may lend
to any borrower  (including certain related entities of the borrower) at any one
time  may  not  exceed  15%  of  the  unimpaired  capital  and  surplus  of  the
institution,  plus an additional 10% of unimpaired capital and surplus for loans
fully secured by readily  marketable  collateral.  At June 30, 2001, the maximum
amount that the Bank could have  loaned to any one  borrower  without  prior OTS
approval was $1.6 million. Pursuant to OTS regulations,  an institution may make
loans in excess of its lending limit up to an amount not to exceed the lesser of
$30.0  million,  or 30%,  of its  unimpaired  capital and surplus to finance the
development  of  residential  housing units provided  certain  requirements  are
satisfied. At June 30, 2001, the largest aggregate amount of loans that the Bank
had outstanding to any one borrower and their related interests was $1.5 million
and consisted of four loans including loans to purchase a business.  The largest
single  loan   outstanding   was  a  $1.1   million   loan  secured  by  an  oil
distributorship property.

     CONSTRUCTION  LOANS.  The Bank offers  construction  financing to qualified
borrowers for construction primarily of single-family residential properties and
to qualified developers for construction of small residential developments.  The
Bank also  provides  construction  financing  for  multi-family  and  commercial
properties.  Construction loans are limited to a maximum  loan-to-value ratio of
75% of the  appraised  value of the  property on an  "as-completed"  basis.  The
current  policy  of the Bank is to  charge  interest  rates  on its  residential
construction loans that convert to a permanent loan at the Bank at the same rate
as its  permanent  loans.  Loans to  finance  the  construction  of  residential
property  on a  speculative  basis  and loans to  finance  the  construction  of
commercial  properties are offered on a variable-rate  basis only, with the rate
indexed to the prime rate plus a negotiated increment. The Bank is currently not
originating  any  new   construction   loans  to  finance  the  construction  of
speculative properties and is limiting the origination of new construction loans
to borrowers with whom the Bank has had substantial  prior experience due to the
significant  time  and  other  requirements   associated  with  originating  and
monitoring construction loans.

     Loan proceeds are disbursed during the construction phase (a maximum of 180
days)   according  to  a  draw  schedule  based  on  the  stage  of  completion.
Construction  loans are  underwritten on the basis of the estimated value of the
property as completed and loan-to-value  ratios must conform to the requirements
for the  permanent  loan. At June 30, 2001,  $1.449  million,  or 1.44%,  of the
Bank's  gross  loan  portfolio  consisted  of  construction  loans  to fund  the
construction  of  one-  to  four-family  properties.  Approximately  half of all
construction  loans  originated  by the Bank convert into  permanent  loans upon
completion of the construction phase.

                                       6
<PAGE>

     Construction  financing  generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a  construction  loan is  dependent  largely upon the accuracy of the
initial  estimate of the  property's  value at  completion  of  construction  or
development and the estimated cost (including interest) of construction.  During
the  construction  phase,  a number of factors  could  result in delays and cost
overruns. If the estimate of construction cost proves to be inaccurate, the Bank
may be required  to advance  funds  beyond the amount  originally  committed  to
permit completion of the development.  If the estimate of the value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is  insufficient  to assure full  repayment.
The ability of a developer to sell  developed  lots or completed  dwelling units
will depend on, among other things, demand, pricing,  availability of comparable
properties and economic conditions. The Bank has sought to minimize this risk by
limiting  construction lending to qualified borrowers in the Bank's market area,
limiting the aggregate amount of outstanding  construction  loans and imposing a
stricter  loan-to-value  ratio requirement than required for one- to four-family
mortgage loans.

     COMMERCIAL LOANS. At June 30, 2001, the Bank had $6.7 million in commercial
business loans which represented 6.74% of the Bank's gross loan portfolio. Under
recent  amendments to the Home Owners' Loan Act ("HOLA"),  the Bank is permitted
to invest up to 20% of its assets in commercial  loans  provided that amounts in
excess of 10% are small business loans. The Bank's  commercial  business lending
activities  are directed  towards small  businesses  located in its market area.
Generally,  the Bank's  commercial  business loans are secured by assets such as
inventory, equipment or other assets and are guaranteed by the principals of the
business.  On a very limited  basis,  the Bank has engaged in dealer  floor-plan
lending  with a  limited  number  of  dealerships  with  which  the Bank has had
substantial experience.  Commercial business loans usually carry a floating rate
set at an increment  over the prime rate and  generally are  underwritten  for a
maximum  of 15  years.  Such  loans  are  structured  as term  loans.  The  Bank
underwrites  its commercial  business loans on the basis of the borrower's  cash
flow and ability to service the debt from  earnings  rather than on the basis of
the underlying  collateral value, and seeks to structure such loans to have more
than one source of repayment.  The borrower is required to provide the Bank with
sufficient information to allow the Bank to make its lending  determination.  In
most instances,  this information  consists of at least three years of financial
statements,  a statement of projected cash flows, current financial  information
on any guarantor and any additional information on the collateral.

     CONSUMER  LOANS.  The Bank's  consumer  loans  consist  primarily  of loans
secured by deposit  accounts,  automobile  loans,  unsecured  personal loans and
credit cards, which represented  1.71%,  1.90%, 2.85% and .58% of its total loan
portfolio,  respectively,  at June 30, 2001.  The Bank also makes boat loans and
home improvement loans pursuant to its consumer lending authority.  The Bank has
recently emphasized consumer lending because of the higher yields on such loans.

     The Bank makes deposit account loans up to 80% of the  depositor's  account
balance.  The interest  rate is normally 2.0% above the rate paid on the account
and the  account  must be pledged  as  collateral  to secure  the loan.  Savings
account  loans are secured by demand notes and interest is due on a  semi-annual
basis. The Bank's automobile loans are generally underwritten in amount of up to
100% of the lesser of the purchase  price of the automobile or the loan value as
published  by the National  Automobile  Dealers  Association.  The terms of such
loans do not  exceed  60 months  and vary  depending  on the age of the  vehicle
securing the loan. The Bank requires the borrower to insure the automobile under
a policy listing the Bank as loss payee.  Boat loans are made up to a maximum of
$60,000. The maximum term of a boat loan is 60 months and will vary depending on
the age of the collateral. The Bank also makes unsecured personal loans of up to
$25,000. The terms of such loans do not exceed 60 months.  Beginning in November
1995, the Bank began to offer VISA(R), MasterCard (R) and VISA Gold (R) cards to
qualified  customers.  Processing  of the  Bank's  credit  cards  is  done by an
unaffiliated third party which receives a fee for such services. Equipment loans
are made in amounts of up to 100% of the purchase  price and have a maximum term
of 60 months depending on the age of the equipment.

     Consumer  loans entail  greater risk than do  residential  mortgage  loans,
particularly  in the case of consumer  loans which are  unsecured  or secured by
rapidly  depreciable assets such as automobiles.  In such cases, any repossessed
collateral for a defaulted  consumer loan may not provide an adequate  source of
repayment of the outstanding loan balance as a result of the greater  likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further  substantial  collection  efforts  against the  borrower.  In  addition,
consumer loan collections are dependent on the borrower's  continuing  financial
stability,  and thus are more  likely  to be

                                       7
<PAGE>

adversely  affected  by job  loss,  divorce,  illness  or  personal  bankruptcy.
Furthermore,  the  application  of various  federal  and state  laws,  including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan borrower  against an assignee of such loans such as the Bank,
and a borrower may be able to assert  against such assignee  claims and defenses
which it has against the seller of the underlying collateral.

     LOAN SOLICITATION AND PROCESSING.  The Bank's mortgage loans have generally
been  originated by its loan  officers,  branch  managers and senior  management
officials.  Loan  originations are obtained from a number of sources,  including
existing and past customers,  members of the local community, and referrals from
attorneys,  established  builders and realtors within the Bank's market area. In
addition, the Bank purchases participations in loans originated by other lenders
and has purchased whole loans from an unaffiliated  mortgage  banking firm. Upon
receipt of a loan application from a prospective borrower,  the Bank reviews the
information  provided and makes an initial  determination  as to whether certain
basic  underwriting  standards  regarding  the type of property,  debt-to-income
ratios and other credit  concerns are satisfied.  A credit report and employment
and other  verifications  are obtained to verify  certain  specific  information
relating to the loan applicant's  employment,  income and credit  standing.  For
real estate loans,  an appraisal of the property  intended to secure the loan is
undertaken by an  independent  appraiser  approved by the Bank. It is the Bank's
policy to obtain  appropriate  insurance  protection  on all real  estate  first
mortgage loans and to obtain a lawyer's  opinion of title which insures that the
property is free of prior encumbrances. The borrower must also obtain paid flood
insurance  when the  property is located in a flood plain as  designated  by the
Department of Housing and Urban Development. It is the Bank's policy to record a
lien on the real estate securing the loan.  Borrowers  generally are required to
advance funds for certain items such as real estate taxes,  flood  insurance and
private mortgage insurance, when applicable.

     Secured  loans in amounts of up to $125,000  may be approved by  individual
loan  officers.  Secured loans  between  $125,000 and $250,000 and all unsecured
loans must be  approved  by a loan  committee  which  consists of at least three
persons, either officers or directors. The loan committee meets weekly to review
and approve loans. All loans in excess of $250,000 must be approved by the Board
of Directors.

     Loan applicants are promptly notified in writing of the Bank's decision. If
the loan is approved,  the notification  will provide that the Bank's commitment
will generally terminate within 30 days of the approval.  It has been the Bank's
experience that substantially all approved loans are funded.

     LOAN  ORIGINATIONS,  PURCHASES AND SALES. Most loans originated by the Bank
are intended to be held in the Bank's portfolio until maturity.  The Bank is not
a  qualified  seller/servicer  for the  Federal  National  Mortgage  Association
("FNMA") or the Federal Home Loan Mortgage  Corporation  ("FHLMC") and generally
does not sell loans in the secondary  market.  Although the Bank uses FNMA/FHLMC
documentation  for its residential  mortgages,  the loans in its portfolio would
generally not qualify for sale to FNMA or FHLMC under standard  programs because
of the absence of title insurance and surveys.  The Bank, however, has purchased
whole loans and  participations  in loans originated by other lenders which meet
FNMA/FHLMC criteria.

     In prior years,  the Bank regularly  purchased loans to supplement  lending
opportunities  in its immediate  market area.  Loan  purchases have decreased in
recent years due to the increased  emphasis on loan  originations in its primary
market area. At June 30, 2001, the Bank's loan portfolio included  approximately
$74,840  in  purchased  mortgages.  All  of  such  loans  are  serviced  by  the
originating broker.

     Generally, the purchase of participations and whole loans involves the same
risks  as  would  the  origination  of the  same  types  of loans as well as the
additional  risks  related  to the  Bank's  lower  level  of  control  over  the
origination and subsequent  administration  of the loans. The Bank has sought to
minimize such risks by employing  more stringent  underwriting  standards in its
underwriting  of  purchased  loans than  required  by its loan  policy for loans
originated by the Bank. At June 30, 2001, all of the Bank's purchased loans were
performing in accordance with their terms.

     NONPERFORMING  LOANS  AND  OTHER  PROBLEM  ASSETS.  The  Bank  continuously
monitors its loan portfolio to detect signs of  deterioration  in credit quality
and to address potential and actual delinquencies. When a borrower fails to make
a payment on a loan,  the Bank  takes  immediate  steps to have the  delinquency
cured and the loan restored to current status.  When a loan is 10 days past due,
the borrower  receives a written  notification;  a late

                                       8
<PAGE>
charge is imposed  on the 16th day of  delinquency.  If payment is not  promptly
received,  the borrower is contacted again both by telephone and in writing, and
efforts are made to formulate an affirmative plan to cure the delinquency. Loans
that are 60 days  delinquent are generally  referred to an attorney who contacts
the borrower.  Loans generally are placed on nonaccrual  status when they become
90 days past due unless they are well secured and in the process of  collection.
Interest  accrued and unpaid at the time a loan was placed on nonaccrual  status
is  charged  against  interest  income.  The Bank will  physically  inspect  all
properties  securing  nonaccrual  loans.  Subsequent  payments  would  either be
applied to the  outstanding  principal  balance or recorded as interest  income,
depending on the assessment of the ultimate  collectibility of the loan based on
a number of factors,  including the type of loan,  the  creditworthiness  of the
borrower,  the  quality  of  the  security  and  prevailing  market  conditions.
Generally, if the loan continues in a delinquent status for 90 days or more, the
Bank may initiate legal proceedings. Consumer loans are charged off and referred
to a collection agency after they are delinquent 120 days.

     Real estate  acquired by the Bank as a result of  foreclosure or by deed in
lieu of  foreclosure is classified as real estate owned until such time as it is
sold.  When such  property is  acquired it is recorded at its fair market  value
less costs to sell.  Any  write-down of the property is charged  directly to the
loan loss reserve.

     The  following  table sets  forth  information  with  respect to the Bank's
nonperforming assets at the dates indicated. At the dates shown, the Bank had no
restructured loans within the meaning of SFAS No. 114.
<TABLE>
<CAPTION>
                                                                      AT JUNE 30,
                                                              --------------------------
                                                                2001              2000
                                                              --------          --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>               <C>
Loans accounted for on a nonaccrual basis: (1)
  Real estate mortgage loans:
     Residential..............................................$     580         $    493
     Nonresidential...........................................       --               73
  Construction................................................       --               --
  Commercial..................................................      234              194
  Consumer....................................................       62               31
                                                              ---------         --------
        Total.................................................$     876         $    791
                                                              =========         ========
Accruing loans which are contractually
   past due 90 days or more:
  Real estate mortgage loans:
     Residential..............................................$      --         $     --
     Nonresidential...........................................       --               --
  Construction................................................       --               --
  Commercial..................................................       --               --
  Consumer....................................................       40               --
                                                              ---------         --------
        Total.................................................$      40         $     --
                                                              =========         ========
        Total nonperforming loans.............................$     916         $    791
                                                              =========         ========
Percentage of total loans.....................................     .92%             0.71%
                                                              ========          ========
Other nonperforming assets....................................$     --          $     --
                                                              ========          ========
<FN>
______________
(1)  Nonaccrual status denotes loans on which, in the opinion of management, the
     collection  of  additional  interest is  unlikely.  Payments  received on a
     nonaccrual loan are either applied to the outstanding  principal balance or
     recorded as interest  income,  depending on management's  assessment of the
     collectibility of the loan.
</FN>
</TABLE>

     During the year ended June 30, 2001, gross interest income of $38,656 would
have been recorded on loans accounted for on a nonaccrual basis if the loans had
been current throughout the respective periods.  Interest on such loans included
in income during such period amounted to $9,847.

     At June 30, 2001, there were no loans which are not currently classified as
non-accrual,  90 days past due or restructured but where known information about
possible credit problems of borrowers causes management to have serious concerns
as to the ability of the borrowers to comply with present loan  repayment  terms
and may result in disclosure as nonaccrual, 90 days past due or restructured.

                                       9
<PAGE>

     ASSET  CLASSIFICATION  AND ALLOWANCE FOR LOAN LOSSES.  Federal  regulations
require  savings  associations  to review their assets on a regular basis and to
classify  them as  "substandard,"  "doubtful"  or  "loss" if  warranted.  Assets
classified  as  substandard  or doubtful  require the  institution  to establish
general allowances for loan losses. If an asset or portion thereof is classified
as loss, the insured  institution must either establish specific loss allowances
in the amount of 100% of the portion of the asset  classified  as loss or charge
off such amount.  An asset which does not currently warrant  classification  but
which possesses weaknesses or deficiencies deserving close attention is required
to be  designated  as "special  mention."  Currently,  general  loss  allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining  an  institution's  regulatory  capital,
while specific valuation allowances for loan losses do not qualify as regulatory
capital.  See  "Regulation  --  Regulation  of the  Bank --  Regulatory  Capital
Requirements."  OTS  examiners  may  disagree  with  the  insured  institution's
classifications  and amounts reserved.  If an institution does not agree with an
examiner's  classification of an asset, it may appeal this  determination to the
OTS.  Management of the Bank reviews assets on a quarterly basis, and at the end
of each quarter, prepares an asset classification listing in conformity with the
OTS regulations,  which is reviewed by the Board of Directors. At June 30, 2001,
the Bank had $2.8 million in assets classified as substandard. Substandard loans
consisted  of  19  single-family  and  nonresidential  mortgage  loans  with  an
aggregate  balance of $1.6 million at June 30, 2001,  21 consumer  loans with an
aggregate balance of $315,000,  eight commercial loans with an aggregate balance
of $241,000 and  repossessed  assets  totaling  $635,000.  The Bank also had one
mortgage  loan of  $20,000,  two  commercial  loans  totaling  $249,000  and one
consumer loan of $16,000 classified as doubtful.

     The  following  table  sets forth an  analysis  of  activity  in the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
                                                                 YEAR ENDED JUNE 30,
                                                                2001              2000
                                                              --------          --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>               <C>
Balance at beginning of period................................$   1,032         $  1,576
                                                               --------         --------
Loans charged off:
  Real estate mortgage loans:
     Residential..............................................      439              272
     Commercial...............................................       --               --
  Construction................................................       --               --
  Commercial..................................................      346               --
  Consumer....................................................      928              859
                                                              ---------         --------
  Total charge-offs...........................................    1,713            1,131
                                                              ---------         --------
Recoveries:
  Real estate mortgage loans:
     Residential..............................................       26                2
     Commercial...............................................       --               --
  Construction................................................       --               --
  Commercial..................................................       --               --
  Consumer....................................................      191              379
                                                              ---------         --------
  Total recoveries............................................      217              381
                                                              ---------         --------
Net loans charged off.........................................    1,496              750
                                                              ---------         --------
Provision for loan losses.....................................    1,500              206
                                                              ---------         --------
Balance at end of period......................................$   1,036         $  1,032
                                                              =========         ========
Ratio of net charge-offs to average
   loans outstanding during the period........................    1.40%             0.68%
                                                              ========          ========
</TABLE>
     In originating loans, the Bank recognizes that credit losses will occur and
that the risk of loss will vary with, among other things, the type of loan being
made, the  creditworthiness  of the borrower over the term of the loan,  general
economic  conditions  and,  in the case of a secured  loan,  the  quality of the
security for the loan. It is management's policy to maintain a general allowance
for loan losses based on, among other things,  regular reviews of  delinquencies
and loan  portfolio  quality,  character and size, the Bank's and the industry's
historical  and projected loss  experience  and current and forecasted  economic
conditions.  The Bank  increases  its  allowance  for loan  losses  by  charging
provisions for possible losses against the Bank's income.

                                       10
<PAGE>
     General allowances are made pursuant to management's  assessment of risk in
the Bank's loan  portfolio  as a whole.  Specific  allowances  are  provided for
individual  loans  when  ultimate  collection  is  considered   questionable  by
management  after reviewing the current status of loans which are  contractually
past due and considering the net realizable  value of the security for the loan.
Management also reviews  individual loans for which full  collectibility may not
be reasonably  assured and evaluates among other things the net realizable value
of the  underlying  collateral.  Management  continues  to actively  monitor the
Bank's  asset  quality and to charge off loans  against the  allowance  for loan
losses when  appropriate or provide  specific loan losses when necessary.  As of
June 30, 2001, the Bank's allowance for loan losses included $0 in specific loss
reserves. Although management believes it uses the best information available to
make  determinations  with  respect to the  allowance  for loan  losses,  future
adjustments may be necessary if economic  conditions differ  substantially  from
the  economic   conditions  in  the  assumptions  used  in  making  the  initial
determinations.

     The following table allocates the Bank's  allowance for loan losses by loan
category  at the  dates  indicated.  The  allocation  of the  allowance  to each
category is not  necessarily  indicative  of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
                                                                            JUNE 30,
                                                    ---------------------------------------------------------
                                                             2001                            2000
                                                    ---------------------------     -------------------------
                                                                   PERCENT OF                     PERCENT OF
                                                                   LOANS IN                       LOANS IN
                                                                   CATEGORY TO                    CATEGORY TO
                                                     AMOUNT        TOTAL LOANS      AMOUNT        TOTAL LOANS
                                                    -------        ------------     -------       -----------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                                  <C>               <C>          <C>               <C>
Real estate mortgage loans.........................  $     431         41.60%       $     802         77.71%
Commercial loans...................................         --           --                --            --
Consumer loans.....................................        605         58.40              230         22.29
                                                     ---------        ------        ---------        ------
    Total allowance for loan losses................  $   1,036        100.00%       $   1,032        100.00%
                                                     =========        ======        =========        ======
</TABLE>
MORTGAGE-BACKED SECURITIES

     The Bank maintains a significant portfolio of mortgage-backed securities in
the form of GNMA, FNMA and FHLMC  participation  or  pass-through  certificates.
GNMA  certificates are guaranteed as to principal and interest by the full faith
and  credit  of the  United  States,  while  FNMA  and  FHLMC  certificates  are
guaranteed by that agency only. Mortgage-backed securities generally entitle the
Bank to receive a pro rata portion of the cash flows from an identified  pool of
mortgages.  Although  mortgage-backed  securities  generally yield less than the
loans for which they are exchanged, they present substantially lower credit risk
and are  more  liquid  than the  individual  mortgage  loans  and may be used to
collateralize  obligations  of the  Bank.  Because  the  Bank  receives  regular
payments of principal and interest from its  mortgage-backed  securities,  these
investments  provide more consistent  cash flows than  investments in other debt
securities  which  generally  only pay  principal at  maturity.  Mortgage-backed
securities  also help the Bank meet  certain  definitional  tests for  favorable
treatment  under federal banking laws. See "Regulation -- Regulation of the Bank
-- Qualified Thrift Lender Test."

     Mortgage-backed  securities  typically  are issued  with  stated  principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates within a range and have similar  maturities.  The underlying pool
of mortgages can be composed of either fixed-rate or ARM loans. As a result, the
interest rate risk  characteristics  of the underlying pool of mortgages,  i.e.,
fixed-rate or adjustable-rate,  as well as prepayment risk, are passed on to the
certificate holder. The life of a mortgage-backed pass-through security is equal
to the life of the underlying mortgages.

     Mortgage-backed  securities,  however,  expose the Bank to  certain  unique
risks.  In a  declining  rate  environment,  accelerated  prepayments  of  loans
underlying these  securities  expose the Bank to the risk that it will be unable
to obtain comparable yields upon reinvestment of the proceeds.  In the event the
mortgage-backed security has been funded with an interest-bearing liability with
a maturity  comparable  to the original  estimated  life of the  mortgage-backed
security,   the  Bank's  interest  rate  spread  could  be  adversely  affected.
Conversely,  in a rising  interest rate  environment,  the Bank may experience a
lower than estimated rate of repayment on the underlying

                                       11
<PAGE>
mortgages,  effectively  extending  the  estimated  life of the  mortgage-backed
security  and  exposing the Bank to the risk that it may be required to fund the
asset with a liability bearing a higher rate of interest.

     The   following   table   sets   forth  the   composition   of  the  Bank's
mortgage-backed  securities  portfolio at the dates indicated.  At June 30, 2001
and 2000,  all of the  Bank's  mortgage-backed  securities  were  designated  as
available-for-sale and carried on the Bank's books at their fair market value.
<TABLE>
<CAPTION>
                                                                               AT JUNE 30,
                                                          ------------------------------------------------
                                                                   2001                          2001
                                                          --------------------          ------------------
                                                          AMOUNT          %             AMOUNT         %
                                                          ------       -------          ------       ------
                                                                            (DOLLARS IN THOUSANDS)
    <S>                                                   <C>          <C>            <C>           <C>
    GNMA .............................................    $    301      26.33%         $    351      13.36%
    FNMA ..............................................        842      73.67             2,004      76.31
    FHLMC..............................................         --       0.00               271      10.33
                                                          --------     ------          --------     ------
                                                          $  1,143     100.00%         $  2,626     100.00%
                                                          ========     ======          ========     ======
</TABLE>
     The following  table sets forth the scheduled  maturities,  amortized cost,
market  values  and  weighted  average  yields  for the  Bank's  mortgage-backed
securities at June 30, 2001.  Expected  maturities will differ from  contractual
maturities due to scheduled  repayments and because borrowers may have the right
to  call or  prepay  obligations  with  or  without  prepayment  penalties.  The
following  table  does not take into  consideration  the  effects  of  scheduled
repayments on the effects of possible prepayments.
<TABLE>
<CAPTION>
                                                        AT JUNE 30, 2001
                     ----------------------------------------------------------------------------------------------
                         ONE TO FIVE YEARS      GREATER THAN FIVE YEARS                    TOTAL
                     ----------------------     -----------------------     ---------------------------------------
                                   WEIGHTED                   WEIGHTED                    APPROXIMATE     WEIGHTED
                     AMORTIZED      AVERAGE     AMORTIZED      AVERAGE      AMORTIZED         MARKET       AVERAGE
                        COST         YIELD         COST         YIELD          COST           VALUE          YIELD
                     ---------     --------     ---------    ----------     ----------    -----------     ---------
                                                              (DOLLARS IN THOUSANDS)
<S>                  <C>             <C>        <C>               <C>        <C>           <C>                <C>
GNMA..............   $      --       0.00%      $      302        5.62%      $     302     $     301          5.62%
FNMA..............         289       6.19              553         5.76            842           842          5.83
                     ---------                  ----------                   ---------     ---------
                     $     289                  $      855                   $   1,144     $   1,143
                     =========                  ==========                   =========     =========
</TABLE>

INVESTMENT ACTIVITIES

     The  Bank is  permitted  under  federal  law to make  certain  investments,
including investments in securities issued by various federal agencies and state
and municipal governments,  deposits at the FHLB of Cincinnati,  certificates of
deposit in federally insured institutions, certain bankers' acceptances, federal
funds and mutual  funds which only  invest in  securities  that are  permissible
investments  for the  Bank.  The  Bank  may  also  invest,  subject  to  certain
limitations,  in  commercial  paper  having  one of the two  highest  investment
ratings of a nationally recognized credit rating agency, and certain other types
of corporate debt securities and mutual funds.

     The Bank invests in investment securities in order to diversify its assets,
manage cash flow,  obtain yield and maintain the minimum levels of liquid assets
required by regulatory authorities. Such investments generally include purchases
of U.S.  government  and agency  securities,  mutual funds and deposits at other
financial institutions. Investment decisions are generally made by the President
in accordance with a formal investment policy adopted by the Board of Directors.
The Board of Directors is informed of all investment purchases.

     Federal  regulations  require the Bank to maintain  an  investment  in FHLB
stock and a minimum  amount of liquid  assets  which may be invested in cash and
specified  securities.  From time to time,  the OTS  adjusts the  percentage  of
liquid assets which savings and loan associations are required to maintain.  See
"Regulation -- Regulation of the Bank -- Liquidity Requirements."

                                       12
<PAGE>

     The general  objectives of the Bank's investment policy are to: (i) provide
and maintain  liquidity;  (ii) make a strong and stable contribution to earnings
without  incurring undue interest rate and credit risk; and (iii) complement the
Bank's lending activities.  Currently,  the Bank's investment portfolio consists
of  cash,  U.S.   government   issues,   federal  agency  issues,   FHLB  stock,
mortgage-backed securities and deposits in the FHLB of Cincinnati. The Bank also
has an investment  in the Franklin U.S.  Government  Securities  Fund.  Based on
information  provided to the Bank by such fund,  the fund  primarily  invests in
Ginnie Mae  securities  which carry a guarantee  by the full faith and credit of
the U.S.  government  as to the timely  payment of interest and  principal.  The
present yield on such fund is 5.84%.

     The following table sets forth the carrying value of the Bank's  investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                      AT JUNE 30,
                                                              --------------------------
                                                                2001              2000
                                                              --------          --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>               <C>
Securities available for sale:
   U.S. government and agency securities......................$     747         $  2,737
   Franklin U.S. Government Securities Fund...................      904              871

Securities held to maturity:
   U.S. government and agency securities......................       --               --
   Certificates of deposit....................................       --               --
   Common stock and other.....................................      285              180
                                                              ---------         --------
      Total investment securities.............................    1,936            3,788
Cash and cash equivalents.....................................   14,599            1,581
FHLB stock....................................................      999              929
                                                              ---------         --------
      Total investments.......................................$  17,534         $  6,298
                                                              =========         ========
</TABLE>



                                       13
<PAGE>

     The following table sets forth the scheduled  maturities,  carrying values,
market values and average yields for the Bank's investment portfolio at June 30,
2001.
<TABLE>
<CAPTION>
                               ONE YEAR OR LESS   ONE TO FIVE YEARS       FIVE TO TEN YEARS
                              ------------------  --------------------    --------------------
                              CARRYING   AVERAGE   CARRYING    AVERAGE    CARRYING     AVERAGE
                                 VALUE     YIELD     VALUE      YIELD       VALUE       YIELD
                              --------   -------   --------    -------    --------    --------
                                                     (DOLLARS IN THOUSANDS)
<S>                           <C>         <C>       <C>           <C>     <C>          <C>
Securities available for sale:
   U.S. government and
     agency securities......  $     77    7.01%     $   --        0.00%   $  507       7.01%
   Franklin U.S. Government
     Securities Fund........        --    0.00          --        0.00        --       0.00

Securities held to maturity:
  Common stock and other....        --    0.00          --        0.00        --       0.00
                              --------              ------                ------
      Total.................  $     77              $   --                $  507
                              ========              ======                ======


<CAPTION>
                                MORE THAN TEN YEARS      TOTAL INVESTMENT PORTFOLIO
                                  -----------------      ----------------------------
                                  CARRYING  AVERAGE      CARRYING   MARKET   AVERAGE
                                    VALUE    YIELD         VALUE    VALUE     YIELD
                                  --------  -------      --------   ------   --------
                                                     (DOLLARS IN THOUSANDS)
<S>                           <C>              <C>       <C>        <C>         <C>
Securities available for sale:
   U.S. government and
     agency securities......  $     163        6.38%     $   747    $  747      6.70%
   Franklin U.S. Government
     Securities Fund........        904        7.50          904       904      7.50

Securities held to maturity:
  Common stock and other....        285        4.25          285       285      4.25
                              ---------                  -------    ------
      Total.................  $   1,352                  $ 1,936    $1,936
                              =========                  =======    ======
</TABLE>

     For further  information  regarding the Bank's investment  securities,  see
Note 2 to Notes to Consolidated Financial Statements included elsewhere herein.


                                       14
<PAGE>
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

     GENERAL.  Deposits  are the primary  source of the Bank's funds for lending
and other investment purposes.  In addition to deposits,  the Bank derives funds
from loan  principal  repayments and interest  payments and maturing  investment
securities. Loan repayments and interest payments are a relatively stable source
of funds,  while deposit  inflows and outflows are  significantly  influenced by
general  interest rates and money market  conditions.  Borrowings may be used to
supplement  the  Bank's  available  funds  and  from  time to time  the Bank has
borrowed funds from the FHLB of Cincinnati.

     DEPOSITS.  The Bank attracts  deposits from its primary market area of Bell
and Harlan Counties,  Kentucky,  and, to a lesser extent,  Claiborne,  Union and
Knox  Counties  Tennessee  and Lee County,  Virginia.  A wide variety of deposit
accounts  are  offered,  including  interest-bearing  and  non  interest-bearing
checking  accounts,  money  market  accounts,  passbook  and  statement  savings
accounts, certificates of deposit and various retirement accounts. Account terms
vary as to minimum balance requirements, maturity and interest rate.

     The Bank's policies are designed  primarily to attract  deposits from local
residents rather than to solicit deposits from areas outside its primary market.
Account  terms,  including  rates,  are  reviewed  on a  periodic  basis and are
compared to the terms  offered for similar  accounts by the Bank's  competitors.
Determination of rates and other terms are based upon competitive concerns,  the
returns on the Bank's various investments and projected liquidity needs.

     Certificates of deposit in amounts of $100,000 or more  constituted  26.84%
of the Bank's total  deposit  portfolio at June 30, 2001.  The majority of these
certificates of deposit  represent  deposits by  individuals.  The Bank does not
actively solicit these accounts from non-deposit  customers and does not offer a
premium rate for such accounts.

     Savings  deposits  in the Bank at June 30,  2001  were  represented  by the
various types of savings programs described below.
<TABLE>
<CAPTION>
INTEREST       MINIMUM                                                     MINIMUM     BALANCES IN  PERCENTAGE OF
 RATE *        TERM                 CATEGORY                                AMOUNT     THOUSANDS    TOTAL DEPOSITS
--------       -------              --------                               -------     -----------  --------------
<S>            <C>                  <C>                                   <C>          <C>                  <C>
2.25%          None                 Passbook accounts                     $      --    $    7,747           7.15%
1.79           None                 NOW accounts                                100         9,524           8.79
3.34           None                 Money market deposit accounts             2,500           567            .52
0.00           None                 Noninterest-bearing checking accounts       100         2,418           2.23

                                    Certificates of Deposit

6.04           12-month             Fixed-term, fixed-rate                    1,000        58,862          54.33
5.89           2-10 year            Fixed-term, fixed-rate                    1,000        29,226          26.98
                                                                                       ----------         ------
                                                                                       $  108,344         100.00%
                                                                                       ==========         ======
<FN>
_____________
*        Weighted average rate.
</FN>
</TABLE>
     MATURITY OF JUMBO CERTIFICATES. The following table indicates the amount of
the Bank's  certificates  of deposit of $100,000 or more by time remaining until
maturity as of June 30, 2001.

                                                            CERTIFICATES
             MATURITY PERIOD                                OF DEPOSITS
             ---------------                               -------------
                                                          (IN THOUSANDS)

              Three months or less.......................   $     4,822
              Over three through six months..............         5,530
              Over six through 12 months.................         7,484
              Over 12 months.............................        11,233
                                                            -----------
                    Total................................   $    29,069
                                                            ===========
                                       15
<PAGE>

     BORROWINGS.  Savings deposits  historically have been the primary source of
funds for the Bank's  lending  and  investment  activities  and for its  general
business activities.  The Bank is authorized,  however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds or to meet deposit
withdrawal requirements.  As a member, the Bank is required to own capital stock
in the FHLB and is authorized to apply for advances secured by such stock and by
certain of the Bank's home mortgages and other assets  (principally,  securities
which are obligations of, or guaranteed by, the United States)  provided certain
standards  related  to  creditworthiness  have  been  met.  See  "Regulation  --
Regulation  of the Bank -- Federal  Home Loan Bank  System."  Advances  are made
pursuant to several different programs,  each of which has its own interest rate
and range of maturity.

     The  following  table sets forth certain  information  regarding the Bank's
FHLB advances (the Bank's only borrowings outstanding during the periods) at the
dates and for the periods indicated.
<TABLE>
<CAPTION>
                                                                        AT OR FOR THE
                                                                      YEAR ENDED JUNE 30,
                                                                -----------------------------
                                                                   2001                2000
                                                                ---------           ---------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                            <C>                  <C>
Advances from FHLB:
   Amounts outstanding at end of period........................$    5,000           $  10,500

   Weighted average rate paid on...............................      6.06%              6.39%

   Maximum amount of borrowings outstanding
      at any month end.........................................$   12,500           $  15,500

   Approximate average short-term borrowings
      outstanding..............................................$    7,048           $   4,958

   Approximate weighted average rate paid on...................      6.72%              6.39%
</TABLE>

     The Bank has a $7.5 million line of credit with the FHLB of  Cincinnati  of
which $5 million was  outstanding at June 30, 2001.  Further asset growth may be
funded through short-term  additional  advances.  The Bank also had $5.0 million
outstanding that matures March, 2003 bearing a rate of 6.08%.

COMPETITION

     The  Bank  experiences  substantial  competition  both  in  attracting  and
retaining savings deposits and in the making of mortgage and other loans.  There
are approximately 10 commercial banks, three thrift  institutions and one credit
union in  Middlesboro  Federal's  market  area.  Although  certain of the Bank's
competitors   are   subsidiaries  of  state-wide  and  interstate  bank  holding
companies,  the Bank's primary competitors in the Middlesboro market are locally
owned and operated banks and thrifts.  Because  mortgage loans originated in the
Bank's primary market area are not generally  saleable in the secondary  market,
mortgage  brokers  and other  non-portfolio  lenders  have not been  significant
competitors  in the Bank's  immediate  market  area.  In  competing  for lending
opportunities in Knox and Union Counties,  the Bank encounters  competition from
larger institutions operating throughout the State of Tennessee.

     The primary  factors in competing for loans are interest  rates,  loan fees
and other  terms,  convenience  and the range of  services  offered  by  various
financial  institutions.  Management seeks to compete with other institutions in
its primary market area by offering  competitive interest rates, loan fees and a
wide variety of deposit products,  and by emphasizing  personal customer service
and  cultivating   relationships   with  local  businesses.   In  competing  for
residential   mortgage  loans,  the  Bank  particularly   emphasizes  its  quick
turn-around on  applications  which are processed  within ten business days. The
Bank offers a high level of personal  service to all of its loan  customers with
loan officers who are ready to meet with  customers at times and places that are
convenient to the customer.

                                       16
<PAGE>
PERSONNEL

     As of June  30,  2001,  the  Bank  had 40  full-time  employees  and  seven
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining  unit.  Management  believes that the Bank enjoys good relations with
its personnel.

PERFORMANCE RATIOS
<TABLE>
<CAPTION>
                                                                        AT OR FOR THE
                                                                       YEAR ENDED JUNE 30,
                                                                -----------------------------
                                                                   2001                2000
                                                                ---------           ---------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                                  <C>                <C>
Return on assets (net income divided by average total assets)..      (.70)%             0.35%
Return on average equity (net income divided by
      average stockholders' equity)............................     (9.95)              5.04
Equity to assets ratio (average equity divided by
      average total assets)....................................      7.07               6.90
</TABLE>

                                   REGULATION
GENERAL

     As a  federally  chartered  savings  association,  the Bank is  subject  to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with such regulatory requirements, and the OTS periodically
examines the Bank for compliance with various regulatory requirements.  The FDIC
also has the  authority  to  conduct  special  examinations.  The Bank must file
reports with the OTS describing  its  activities and financial  condition and is
also subject to certain reserve requirements  promulgated by the Federal Reserve
Board. This supervision and regulation is intended  primarily for the protection
of depositors. Certain of these regulatory requirements are referred to below or
appear elsewhere herein.

REGULATION OF THE BANK

     FINANCIAL  MODERNIZATION  LEGISLATION.  On  November  12,  1999,  President
Clinton  signed  legislation  which  could  have a  far-reaching  impact  on the
financial services  industry.  The  Gramm-Leach-Bliley  ("G-L-B") Act authorizes
affiliations between banking, securities and insurance firms and authorizes bank
holding  companies  and national  banks to engage in a variety of new  financial
activities.  Among the new  activities  that will be  permitted  to bank holding
companies are  securities  and  insurance  brokerage,  securities  underwriting,
insurance  underwriting  and merchant  banking.  The Federal  Reserve Board,  in
consultation  with  the  Secretary  of  the  Treasury,  may  approve  additional
financial activities.  The G-L-B Act, however,  prohibits future acquisitions of
existing unitary savings and loan holding companies,  like the Company, by firms
which are engaged in commercial activities and limits the permissible activities
of unitary holding companies formed after May 4, 1999.

     The G-L-B Act imposes  new  requirements  on  financial  institutions  with
respect to customer  privacy.  The G-L-B Act generally  prohibits  disclosure of
customer  information  to  non-affiliated  third parties unless the customer has
been given the  opportunity  to object and has not objected to such  disclosure.
Financial  institutions  are further required to disclose their privacy policies
to customers  annually.  Financial  institutions,  however,  will be required to
comply  with state law if it is more  protective  of customer  privacy  than the
G-L-B Act.  The G-L-B Act directs the federal  banking  agencies,  the  National
Credit Union Administration,  the Secretary of the Treasury,  the Securities and
Exchange  Commission and the Federal Trade Commission,  after  consultation with
the National Association of Insurance Commissioners,  to promulgate implementing
regulations  within six  months of  enactment.  The  privacy  provisions  became
effective in November 2000, with full compliance required by July 1, 2001.

     The G-L-B Act contains significant  revisions to the FHLB System. The G-L-B
Act imposes new capital  requirements  on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption  requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute

                                       17
<PAGE>
$300 million to pay interest on certain government obligations in favor of a 20%
of net  earnings  formula.  The G-L-B Act expands the  permissible  uses of FHLB
advances by community  financial  institutions (under $500 million in assets) to
include   funding   loans  to  small   businesses,   small   farms   and   small
agri-businesses.  The G-L-B  Act  makes  membership  in the FHLB  voluntary  for
federal savings associations.

     The  G-L-B  Act  contains  a  variety  of  other  provisions   including  a
prohibition  against ATM surcharges  unless the customer has first been provided
notice of the  imposition  and  amount of the fee.  The  G-L-B Act  reduces  the
frequency of Community  Reinvestment Act  examinations for smaller  institutions
and imposes certain reporting requirements on depository  institutions that make
payments  to   non-governmental   entities  in  connection  with  the  Community
Reinvestment  Act.  The  G-L-B  Act  eliminates  the SAIF  special  reserve  and
authorizes a federal  savings  association  that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.

     The  Company  is  unable  to  predict  the  impact  of the G-L-B Act on its
operations  at this time.  Although the G-L-B Act reduces the range of companies
with which may acquire  control of the Company,  it may facilitate  affiliations
with companies in the financial services industry.

     REGULATORY  CAPITAL  REQUIREMENTS.  Under OTS  capital  standards,  savings
associations  must maintain  "tangible"  capital equal to 1.5% of adjusted total
assets,  "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary"  capital equal to 8.0% of "risk-weighted" assets. In
addition,  the  OTS  has  recently  adopted  regulations  which  impose  certain
restrictions on savings  associations that have a total risk-based capital ratio
that is less than  8.0%,  a ratio of Tier 1 capital to  risk-weighted  assets of
less than 4.0% or a ratio of Tier 1 capital  to  adjusted  total  assets of less
than  4.0%  (or  3.0% if the  institution  is rated  Composite  1 under  the OTS
examination rating system).  See " -- Prompt Corrective  Regulatory Action." For
purposes  of this  regulation,  Tier 1 capital has the same  definition  as core
capital  which is defined as common  stockholders'  equity  (including  retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity  accounts of fully  consolidated  subsidiaries,  certain
nonwithdrawable  accounts  and  pledged  deposits  and  "qualifying  supervisory
goodwill."  Core  capital is  generally  reduced  by the  amount of the  savings
association's  intangible assets for which no market exists.  Limited exceptions
to the  deduction  of  intangible  assets are provided  for  purchased  mortgage
servicing rights and qualifying supervisory goodwill.  Tangible capital is given
the same  definition  as core  capital  but does not  include an  exception  for
qualifying  supervisory goodwill and is reduced by the amount of all the savings
association's  intangible  assets with only a limited  exception  for  purchased
mortgage servicing rights and purchased credit card relationship.  Both core and
tangible  capital  are  further  reduced  by an  amount  equal to a the  savings
association's debt and equity investments in subsidiaries  engaged in activities
not permissible to national banks other than subsidiaries  engaged in activities
undertaken  as  agent  for  customers  or in  mortgage  banking  activities  and
subsidiary depository institutions or their holding companies. At June 30, 2001,
the Bank had no such investments.

     Adjusted  total  assets  are  a  savings   association's  total  assets  as
determined under generally accepted accounting principles,  adjusted for certain
goodwill  amounts  and  increased  by a pro  rated  portion  of  the  assets  of
subsidiaries  in which the savings  association  holds a minority  interest  and
which  are not  engaged  in  activities  for  which the  capital  rules  require
deduction of its debt and equity investments.  Adjusted total assets are reduced
by the amount of assets that have been deducted from capital, the portion of the
savings  association's  investments in subsidiaries  that must be netted against
capital  under  the  capital  rules  and,  for  purposes  of  the  core  capital
requirement, qualifying supervisory goodwill.

     In  determining  compliance  with the  risk-based  capital  requirement,  a
savings  association  is  allowed  to use both core  capital  and  supplementary
capital  provided the amount of  supplementary  capital used does not exceed the
savings association's core capital.  Supplementary capital is defined to include
certain  preferred stock issues,  nonwithdrawable  accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital  instruments  and a portion of the savings  association's  general
loss allowances.  Total core and supplementary capital are reduced by the amount
of  capital  instruments  held by  other  depository  institutions  pursuant  to
reciprocal  arrangements and the savings  association's high loan-to-value ratio
land loans and  non-residential  construction loans and equity investments other
than those deducted from core and tangible  capital.  At June 30, 2001, the Bank
had no high ratio land or  nonresidential  construction  loans and had no equity
investments for which OTS regulations require a deduction from total capital.

                                       18
<PAGE>
     The risk-based capital requirement is measured against risk-weighted assets
which  equal  the sum of each  asset  and the  credit-equivalent  amount of each
off-balance sheet item after being multiplied by an assigned risk weight.  Under
the OTS risk-weighting system, one- to four-family first mortgages not more than
90 days past due with loan-to-value  ratios at origination not exceeding 80% are
assigned  a risk  weight  of 50%.  Consumer  and  non-qualifying  single-family,
multi-family  and residential  construction  loans are assigned a risk weight of
100%. Mortgage-backed securities issued, or fully guaranteed as to principal and
interest,  by the FHLMC or FNMA and the book value of FHLB stock are  assigned a
20% risk weight.  Cash and U.S.  Government  securities backed by the full faith
and credit of the U.S. Government are given a 0% risk weight.

     The table  below  presents  the Bank's  capital  position  relative  to its
various regulatory capital requirements at June 30, 2001.
<TABLE>
<CAPTION>
                                                                                PERCENT OF
                                                              AMOUNT            ASSETS  (1)
                                                              ------            -----------
                                                                 (DOLLARS IN THOUSANDS)
         <S>                                                  <C>                  <C>
         Tangible capital.....................................$   8,545            6.79%
         Tangible capital requirement.........................    1,887            1.50
                                                              ---------           -----
         Excess (deficit).....................................$   6,658            5.29%
                                                              =========           =====

         Core capital.........................................$   8,545            6.79%
         Core capital requirement.............................    5,031            4.00
                                                              ---------           -----
         Excess (deficit).....................................$   3,514            2.79%
                                                              =========           =====

         Risk-based capital...................................$   9,581           11.61%
         Risk-based capital requirement.......................    6,605            8.00
                                                              ---------           -----
         Excess (deficit).....................................$   2,976            3.61%
                                                              =========           =====
         <FN>
         _____________
         (1)      Based on adjusted total assets for purposes of the tangible
                  capital and core capital requirements and risk-weighted assets
                  for purpose of the risk-based capital requirement.
         </FN>
         </TABLE>
     The OTS requires  savings  institutions  with more than a "normal" level of
interest rate risk to maintain additional total capital. A savings institution's
interest rate risk is measured in terms of the sensitivity of its "net portfolio
value" to changes in interest rates. Net portfolio value is defined,  generally,
as the  present  value  of  expected  cash  inflows  from  existing  assets  and
off-balance  sheet  contracts  less the present  value of expected cash outflows
from existing  liabilities.  A savings  institution will be considered to have a
"normal"  level  of  interest  rate  risk  exposure  if the  decline  in its net
portfolio  value  after an  immediate  200 basis  point  increase or decrease in
market interest rates  (whichever  results in the greater  decline) is less than
two percent of the current  estimated  economic  value of its assets.  A savings
institution  with a greater than normal interest rate risk is required to deduct
from  total  capital,   for  purposes  of  calculating  its  risk-based  capital
requirement,  an amount (the "interest rate risk  component")  equal to one-half
the difference  between the  institution's  measured  interest rate risk and the
normal level of interest  rate risk,  multiplied  by the  economic  value of its
total assets.

     The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the  institution in a schedule to its quarterly
Thrift  Financial  Report and using the  interest  rate risk  measurement  model
adopted by the OTS. The amount of the interest rate risk  component,  if any, to
be  deducted  from  a  savings  institution's  total  capital  is  based  on the
institution's  Thrift  Financial  Report  filed two  quarters  earlier.  Savings
institutions  with less than $300  million  in assets and a  risk-based  capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial  Reports.  However,  the OTS will require any exempt
savings  institution  that it determines  may have a high level of interest rate
risk exposure to file such schedule on a quarterly  basis. The Bank has not been
advised that it is deemed to have more than normal level of interest rate risk.

                                       19
<PAGE>

     In addition to requiring generally applicable capital standards for savings
institutions,  the OTS is  authorized  to establish the minimum level of capital
for a savings  institution at such amount or at such ratio of  capital-to-assets
as the OTS  determines to be necessary or  appropriate  for such  institution in
light of the particular circumstances of the institution.  The OTS may treat the
failure of any savings institution to maintain capital at or above such level as
an unsafe or unsound  practice and may issue a directive  requiring  any savings
institution  which  fails to  maintain  capital  at or above the  minimum  level
required by the OTS to submit and adhere to a plan for increasing capital.  Such
an order may be enforced in the same manner as an order issued by the FDIC.

     PROMPT  CORRECTIVE  REGULATORY  ACTION.  Under FDICIA,  the federal banking
regulators  are  required  to  take  prompt  corrective  action  if  an  insured
depository  institution  fails to satisfy certain minimum capital  requirements,
including a leverage  limit,  a risk-based  capital  requirement,  and any other
measure deemed  appropriate by the federal banking  regulators for measuring the
capital  adequacy  of  an  insured  depository  institution.  All  institutions,
regardless  of their  capital  levels,  are  restricted  from making any capital
distribution or paying any management fees if the institution  would  thereafter
fail to satisfy  the  minimum  levels for any of its  capital  requirements.  An
institution  that  fails to meet the  minimum  level  for any  relevant  capital
measure (an  "undercapitalized  institution")  may be: (i) subject to  increased
monitoring by the appropriate federal banking regulator; (ii) required to submit
an acceptable  capital  restoration  plan within 45 days; (iii) subject to asset
growth  limits;  and (iv)  required  to obtain  prior  regulatory  approval  for
acquisitions,  branching and new lines of  businesses.  The capital  restoration
plan must  include a guarantee  by the  institution's  holding  company that the
institution  will comply with the plan until it has been adequately  capitalized
on average for four consecutive quarters,  under which the holding company would
be liable up to the lesser of 5% of the institution's total assets or the amount
necessary to bring the  institution  into capital  compliance  as of the date it
failed  to  comply  with  its  capital   restoration   plan.  A   "significantly
undercapitalized"  institution, as well as any undercapitalized institution that
does not  submit an  acceptable  capital  restoration  plan,  may be  subject to
regulatory demands for recapitalization,  broader application of restrictions on
transactions  with  affiliates,  limitations on interest rates paid on deposits,
asset  growth  and other  activities,  possible  replacement  of  directors  and
officers,  and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also be
required  to divest the  institution  or the  institution  could be  required to
divest   subsidiaries.   The  senior  executive   officers  of  a  significantly
undercapitalized   institution   may  not  receive   bonuses  or   increases  in
compensation  without prior  approval and the  institution  is  prohibited  from
making  payments of principal  or interest on its  subordinated  debt.  In their
discretion,  the  federal  banking  regulators  may also  impose  the  foregoing
sanctions on an  undercapitalized  institution if the regulators  determine that
such actions are  necessary  to carry out the purposes of the prompt  corrective
provisions.  If an institution's ratio of tangible capital to total assets falls
below the  "critical  capital  level"  established  by the  appropriate  federal
banking  regulator,  the  institution  will be  subject  to  conservatorship  or
receivership within specified time periods.

     Under  the  implementing  regulations,   the  federal  banking  regulators,
including the OTS,  generally  measure an institution's  capital adequacy on the
basis of its total  risk-based  capital ratio (the ratio of its total capital to
risk-weighted  assets),  Tier 1 risk-based  capital ratio (the ratio of its core
capital  to  risk-weighted  assets)  and  leverage  ratio (the ratio of its core
capital to adjusted total assets).  The following table shows the capital ratios
required for the various prompt corrective action categories.
<TABLE>
<CAPTION>
                                                     ADEQUATELY                                     SIGNIFICANTLY
                           WELL CAPITALIZED          CAPITALIZED         UNDERCAPITALIZED        UNDERCAPITALIZED
                           ----------------          -----------         ----------------        ----------------
<S>                        <C>                       <C>                 <C>                     <C>
Total risk-based
    capital ratio           10.0% or more            8.0% or more        Less than 8.0%          Less than 6.0%
Tier 1 risk-based
    capital ratio            6.0% or more            4.0% or more        Less than 4.0%          Less than 3.0%
Leverage ratio               5.0% or more            4.0% or more *      Less than 4.0% *        Less than 3.0%
<FN>
-----------
*  3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>

A "critically undercapitalized" savings institution is defined as an institution
that  has a ratio of  "tangible  equity"  to total  assets  of less  than  2.0%.
Tangible equity is defined as core capital plus cumulative  perpetual  preferred
stock  (and  related  surplus)  less  all  intangibles   other  than  qualifying
supervisory  goodwill and certain purchased  mortgage

                                       20
<PAGE>
servicing rights. The OTS may reclassify a well capitalized  savings institution
as  adequately   capitalized  and  may  require  an  adequately  capitalized  or
undercapitalized  institution to comply with the supervisory  actions applicable
to  institutions  in the next lower capital  category (but may not  reclassify a
significantly  undercapitalized  institution as critically  undercapitalized) if
the OTS  determines,  after notice and an  opportunity  for a hearing,  that the
savings institution is in an unsafe or unsound condition or that the institution
has received and not  corrected a  less-than-satisfactory  rating for any CAMELS
rating category.

     QUALIFIED THRIFT LENDER TEST. A savings  institution that does not meet the
Qualified  Thrift Lender test ("QTL Test") must either convert to a bank charter
or comply with the following restrictions on its operations: (i) the institution
may not  engage in any new  activity  or make any new  investment,  directly  or
indirectly,  unless such activity or investment  is  permissible  for a national
bank; (ii) the branching powers of the institution  shall be restricted to those
of a national  bank  located;  (iii) the  institution  shall not be  eligible to
obtain  any  advances  from its  FHLB;  and (iv)  payment  of  dividends  by the
institution  shall be subject to the rules  regarding  payment of dividends by a
national bank.  Upon the expiration of three years from the date the institution
ceases to be a Qualified  Thrift  Lender,  it must cease any  activity,  and not
retain any investment not permissible for a national bank and immediately  repay
any outstanding FHLB advances (subject to safety and soundness considerations).

     To  qualify  as a QTL,  a savings  institution  must  either  qualify  as a
"domestic  building and loan  association"  under the  Internal  Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles,  property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets.  Qualified Thrift  Investments  include  investments in
residential  mortgages,  home equity loans, loans made for educational purposes,
small business loans, credit card loans and mortgage-backed securities.

     A savings  institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months.  A savings  institution  that fails to  maintain
Qualified  Thrift Lender status will be permitted to requalify  once,  and if it
fails the QTL Test a second  time,  it will  become  immediately  subject to all
penalties as if all time limits on such penalties had expired. At June 30, 2001,
approximately  70.03% of the Bank's  assets were  invested in  Qualified  Thrift
Investments.

     DIVIDEND LIMITATIONS.  Under OTS regulations,  the Bank is not permitted to
pay  dividends on its capital stock if its  regulatory  capital would thereby be
reduced below the amount then required for the liquidation  account  established
for the benefit of certain  depositors of the Bank at the time of the Conversion
and Reorganization. In addition, savings institution subsidiaries of savings and
loan holding companies are required to give the OTS 30 days' prior notice of any
proposed declaration of dividends to the holding company.

     OTS regulations require that savings  institutions submit notice to the OTS
prior to making a capital distribution if (a) they would not be well-capitalized
after the distribution,  (b) the distribution  would result in the retirement of
any of the  institution's  common  or  preferred  stock or debt  counted  as its
regulatory capital, or (c) the institution is a subsidiary of a holding company.
A  savings  institution  must  make  application  to the  OTS  to pay a  capital
distribution  if  (x)  the  institution  would  not  be  adequately  capitalized
following the distribution,  (y) the institution's  total  distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution  would  otherwise  violate  applicable  law  or  regulation  or  an
agreement  with  or  condition  imposed  by the  OTS.  If  neither  the  savings
institution  nor the proposed  capital  distribution  meet any of the  foregoing
criteria,  then no notice or  application  is  required to be filed with the OTS
before making a capital  distribution.  The OTS may disapprove or deny a capital
distribution  if in  the  view  of  the  OTS,  the  capital  distribution  would
constitute an unsafe or unsound practice.

     Under  the OTS'  prompt  corrective  action  regulations,  the Bank is also
prohibited   from  making  any  capital   distributions   if  after  making  the
distribution,  the Bank would have: (i) a total risk-based capital ratio of less
than 8.0%; (ii) a Tier 1 risk-based  capital ratio of less than 4.0%; or (iii) a
leverage  ratio of less than 4.0%. The OTS,  after  consultation  with the FDIC,
however,  may  permit  an  otherwise  prohibited  stock  repurchase  if  made in
connection  with the issuance of additional  shares in an equivalent  amount and
the repurchase will reduce the institution's  financial obligations or otherwise
improve the institution's financial condition.

                                       21
<PAGE>
     In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves  and deducted for Federal  income tax  purposes are not  available  for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then  current  tax rate by the Bank on the  amount  of  earnings
removed from the reserves for such distributions. See "Taxation."

     SAFETY AND  SOUNDNESS  STANDARDS.  Under  FDICIA,  as amended by the Riegle
Community  Development and Regulatory  Improvement Act of 1994 (the "CDRI Act"),
each  Federal  banking  agency is required  to  establish  safety and  soundness
standards for institutions  under its authority.  The guidelines  adopted by the
OTS, along with the other federal banking agencies, require savings institutions
to maintain internal controls and information systems and internal audit systems
that are  appropriate  for the  size,  nature  and  scope  of the  institution's
business.  The  guidelines  also  establish  certain  basic  standards  for loan
documentation,  credit  underwriting,  interest  rate risk  exposure,  and asset
growth. The guidelines further provide that savings institutions should maintain
safeguards  to prevent the payment of  compensation,  fees and benefits that are
excessive or that could lead to material  financial  loss,  and should take into
account  factors  such  as  comparable   compensation  practices  at  comparable
institutions.  If the  OTS  determines  that  a  savings  institution  is not in
compliance  with  the  safety  and  soundness  guidelines,  it may  require  the
institution  to  submit  an  acceptable  plan to  achieve  compliance  with  the
guidelines.  A savings institution must submit an acceptable  compliance plan to
the OTS  within 30 days of  receipt  of a request  for such a plan.  Failure  to
submit or implement a compliance  plan may subject the institution to regulatory
sanctions. Management believes that the Bank already meets substantially all the
standards adopted in the interagency guidelines,  and therefore does not believe
that  implementation  of these regulatory  standards will materially  affect the
Bank's operations.

     Additionally, under FDICIA, as amended by the CDRI Act, the Federal banking
agencies are required to establish  standards  relating to the asset quality and
earnings that the agencies  determine to be  appropriate.  On July 10, 1995, the
federal banking agencies, including the OTS, issued proposed guidelines relating
to asset  quality  and  earnings.  Under  the  proposed  guidelines,  a  savings
institution  should maintain systems,  commensurate with its size and the nature
and  scope  of  its   operations,   to  identify   problem  assets  and  prevent
deterioration  in those assets as well as to evaluate  and monitor  earnings and
ensure that earnings are sufficient to maintain  adequate  capital and reserves.
Management believes that the asset quality and earnings  standards,  in the form
proposed by the banking agencies, would not have a material effect on the Bank's
operations.

     DEPOSIT  INSURANCE.  The Bank is  required  to pay  assessments  based on a
percentage of its insured  deposits to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit  Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary  to  maintain  the  designated  reserve  ratio of the SAIF at 1.25% of
estimated  insured  deposits  or at a higher  percentage  of  estimated  insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.

     Under the  FDIC's  risk-based  deposit  insurance  assessment  system,  the
assessment rate for an insured depository  institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the  institution's  capital level and supervisory  evaluations.  Based on the
data reported to regulators  for the date closest to the last day of the seventh
month preceding the semi-annual assessment period,  institutions are assigned to
one of three  capital  groups -- well  capitalized,  adequately  capitalized  or
undercapitalized  -- using the same  percentage  criteria  as under  the  prompt
corrective action  regulations.  See " -- Prompt Corrective  Regulatory Action."
Within each capital group,  institutions  are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other  information  as the FDIC  determines to be relevant to
the  institution's  financial  condition  and  the  risk  posed  to the  deposit
insurance fund.  Subgroup A consists of financially sound institutions with only
a few minor  weaknesses.  Subgroup B consists of institutions  that  demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the  institution  and  increased  risk of loss to the  deposit  insurance  fund.
Subgroup C consists of institutions that pose a substantial  probability of loss
to the deposit insurance fund unless effective corrective action is taken.

     The FDIC has adopted an  assessment  schedule  for SAIF  deposit  insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest  supervisory  ratings  is  zero  and  institutions  in  the  worst  risk
assessment classification are assessed at the rate of 0.27% of insured deposits.
Until December 31, 1999, however,  SAIF-insured  institutions,  were required to
pay  assessments  to the  FDIC at the  rate of 6.5  basis  points  to

                                       22
<PAGE>
help fund interest payments on certain bonds issued by the Financing Corporation
("FICO") an agency of the federal government established to finance takeovers of
insolvent thrifts.  During this period, Bank Insurance Fund ("BIF") members were
assessed for these  obligations at the rate of 1.3 basis points.  Since December
31,  1999,  both BIF and SAIF  members  are  assessed  at the same rate for FICO
payments.

     TRANSACTIONS WITH AFFILIATES. Transactions between savings institutions and
any affiliate  are governed by Sections 23A and 23B of the Federal  Reserve Act.
An affiliate of a savings  institution is any company or entity which  controls,
is controlled by or is under common control with the savings  institution.  In a
holding company  context,  the parent holding  company of a savings  institution
(such as the  Company) and any  companies  which are  controlled  by such parent
holding company are affiliates of the savings institution.  Generally,  Sections
23A and 23B (i)  limit  the  extent  to which  the  savings  institution  or its
subsidiaries may engage in "covered  transactions"  with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and contain
an aggregate  limit on all such  transactions  with all  affiliates to an amount
equal to 20% of such capital  stock and surplus,  and (ii) require that all such
transactions be on terms  substantially  the same, or at least as favorable,  to
the  institution  or subsidiary as those provided to a  non-affiliate.  The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee  and  similar  other  types of  transactions.  In addition to the
restrictions  imposed by Sections  23A and 23B, no savings  institution  may (i)
loan or otherwise extend credit to an affiliate,  except for any affiliate which
engages only in activities which are permissible for bank holding companies,  or
(ii)  purchase  or invest in any  stocks,  bonds,  debentures,  notes or similar
obligations of any affiliate,  except for affiliates  which are  subsidiaries of
the savings institution.  Section 106 of the BHCA which also applies to the Bank
prohibits the Bank from extending  credit to or offering any other services,  or
fixing or varying the consideration for such extension of credit or service,  on
the  condition  that  the  customer  obtain  some  additional  service  from the
institution or certain of its affiliates or not obtain  services of a competitor
of the institution, subject to certain exceptions.

     LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS.  Savings
institutions are also subject to the restrictions  contained in Section 22(h) of
the Federal Reserve Act on loans to executive officers,  directors and principal
stockholders.  Under  Section  22(h),  loans to an  executive  officer  and to a
greater than 10% stockholder of a savings  institution,  and certain  affiliated
entities of either, may not exceed, together with all other outstanding loans to
such person and affiliated entities the institution's loan to one borrower limit
(generally equal to 15% of the institution's  unimpaired capital and surplus and
an additional 10% of such capital and surplus for loans fully secured by certain
readily  marketable  collateral).  Section  22(h) also  prohibits  loans,  above
amounts  prescribed by the appropriate  federal  banking  agency,  to directors,
executive  officers and greater than 10% stockholders of a savings  institution,
and their  respective  affiliates,  unless such loan is approved in advance by a
majority of the board of  directors  of the  institution  with any  "interested"
director  not  participating  in the  voting.  The  Federal  Reserve  Board  has
prescribed the loan amount (which includes all other  outstanding  loans to such
person), as to which such prior board of director approval is required, as being
the greater of $25,000 or 5% of capital and surplus (up to  $500,000).  Further,
the Federal  Reserve  Board  pursuant to Section  22(h)  requires  that loans to
directors,  executive  officers  and  principal  stockholders  be made on  terms
substantially  the same as offered in comparable  transactions to other persons.
Section 22(h) also generally prohibits a depository  institution from paying the
overdrafts of any of its executive  officers or directors.  Section 22(g) of the
Federal  Reserve Act  requires  that loans to executive  officers of  depository
institutions  not be made on terms more  favorable  than those afforded to other
borrowers,  requires  approval  for such  extensions  of  credit by the board of
directors  of the  institution,  and  imposes  reporting  requirements  for  and
additional  restrictions  on the  type,  amount  and  terms of  credits  to such
officers. In addition, Section 106 of the BHCA prohibits extensions of credit to
executive officers, directors, and greater than 10% stockholders of a depository
institution  by  any  other  institution  which  has  a  correspondent   banking
relationship  with the  institution,  unless  such  extension  of  credit  is on
substantially  the same  terms as those  prevailing  at the time for  comparable
transactions  with other  persons and does not involve more than the normal risk
of repayment or present other unfavorable features.

     LIQUIDITY  REQUIREMENTS.  The Bank is required to  maintain  liquid  assets
(cash,  deposits  maintained pursuant to the Federal Reserve Board requirements,
time and savings  deposits in certain  institutions,  obligations  of states and
political  subdivisions thereof,  shares in mutual funds with certain restricted
investment  policies,  highly  rated  corporate  debt  and  mortgage  loans  and
mortgage-related  securities  with less than one year to  maturity or subject to
purchase within one year) consistent with safe and sound operation.

                                       23
<PAGE>
     FEDERAL  HOME LOAN  BANK  SYSTEM.  The Bank is a member of the FHLB,  which
consists of 12 Federal Home Loan Banks subject to supervision  and regulation by
the Federal Housing  Finance Board ("FHFB").  The FHFBs provide a central credit
facility  primarily  for  member  institutions.  As a  member  of  the  FHLB  of
Cincinnati,  the Bank is required to acquire and hold shares of capital stock in
the FHLB of Cincinnati in an amount at least equal to 1% of the aggregate unpaid
principal of its home  mortgage  loans,  home  purchase  contracts,  and similar
obligations at the beginning of each year, or 1/20 of its advances from the FHLB
of  Cincinnati,  whichever  is  greater.  The Bank was in  compliance  with this
requirement  with  investment in FHLB of  Cincinnati  stock at June 30, 2001, of
$998,800.  The FHLB of Cincinnati is funded primarily from proceeds derived from
the sale of  consolidated  obligations of the FHLB System.  It makes advances to
members in accordance  with policies and procedures  established by the FHFB and
the Board of Directors of the FHLB of Cincinnati.  As of June 30, 2001, the Bank
had $5 million in advances and other borrowings from the FHLB of Cincinnati. See
"Business  of the Bank --  Deposit  Activities  and  Other  Sources  of Funds --
Borrowings."

     FEDERAL  RESERVE  SYSTEM.  Pursuant to regulations  of the Federal  Reserve
Board, a thrift  institution must maintain average daily reserves equal to 3% on
transaction accounts of up to $42.8 million of transaction accounts, plus 10% on
the remainder.  This  percentage is subject to adjustment by the Federal Reserve
Board. Because required reserves must be maintained in the form of vault cash or
in a non-interest  bearing  account at a Federal Reserve Bank, the effect of the
reserve   requirement   is  to   reduce   the   amount   of  the   institution's
interest-earning  assets.  As of  June  30,  2001,  the  Bank  met  its  reserve
requirements.

REGULATION OF THE COMPANY

     GENERAL.  The  Company is a savings  and loan  holding  company  within the
meaning of the HOLA. As such, the Company is registered with the OTS and subject
to OTS regulations,  examinations,  supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions  in its  dealings  with the Company  and  affiliates  thereof.  The
Company is required to file certain reports with, and otherwise  comply with the
rules and regulations of the SEC under the federal securities laws.

     ACTIVITIES  RESTRICTIONS.  The Board of Directors of the Company  presently
intends to operate the Company as a unitary  savings and loan  holding  company.
There are generally no  restrictions  on the activities of a unitary savings and
loan holding company.  However,  if the Director of OTS determines that there is
reasonable  cause to believe that the continuation by a savings and loan holding
company of an  activity  constitutes  a serious  risk to the  financial  safety,
soundness,  or stability of its subsidiary savings association,  the Director of
OTS may impose  such  restrictions  as deemed  necessary  to  address  such risk
including limiting:  (i) payment of dividends by the savings  institution,  (ii)
transactions  between the savings institution and its affiliates;  and (iii) any
activities of the savings  institution that might create a serious risk that the
liabilities  of the  holding  company and its  affiliates  may be imposed on the
savings institution.  Notwithstanding the above rules as to permissible business
activities  of  unitary  savings  and loan  holding  companies,  if the  savings
institution  subsidiary  of such a holding  company  fails to meet the QTL Test,
then such unitary  holding  company shall also  presently  become subject to the
activities  restrictions applicable to multiple holding companies and unless the
savings  association  requalifies as a QTL within one year thereafter,  register
as, and  become  subject  to,  the  restrictions  applicable  to a bank  holding
company. See " -- Regulation of the Bank -- Qualified Thrift Lender Test."

     If the  Company  were to acquire  control of another  savings  association,
other than  through  merger or other  business  combination  with the Bank,  the
Company  would  thereupon  become a multiple  savings and loan holding  company.
Except where such acquisition is pursuant to the authority to approve  emergency
thrift  acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidiaries  (other than the
Bank or other subsidiary  savings  institutions)  would thereafter be subject to
further  restrictions.  Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution may commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity,  upon prior notice
to, and no  objection  by the OTS,  other than:  (i)  furnishing  or  performing
management  services for a subsidiary  savings  institution;  (ii) conducting an
insurance agency or escrow  business;  (iii) holding,  managing,  or liquidating
assets owned by or acquired from a subsidiary savings institution;  (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting  as  trustee  under  deeds of trust;  (vi)  those  activities  previously
directly  authorized  by  regulation  as of March 5,  1987 to be  engaged  in by
multiple holding companies;  or (vii) those activities authorized

                                       24
<PAGE>
by the Federal Reserve Board as permissible for bank holding  companies,  unless
the  Director  of OTS by  regulation  prohibits  or limits such  activities  for
savings and loan holding  companies.  Those activities  described in (vii) above
must also be  approved  by the  Director  of OTS prior to being  engaged in by a
multiple holding company.

     RESTRICTIONS ON ACQUISITIONS. The HOLA generally prohibits savings and loan
holding companies from acquiring, without prior approval of the Director of OTS,
(i) control of any other savings institution or savings and loan holding company
or  substantially  all the  assets  thereof,  or (ii) more than 5% of the voting
shares  of a savings  institution  or  holding  company  thereof  which is not a
subsidiary.  Except with the prior  approval of the Director of OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise  more than 25% of such company's  stock,  may also acquire
control of any savings institution, other than a subsidiary savings institution,
or of any other savings and loan holding company.

     The  Director  of  OTS  may  only  approve  acquisitions  resulting  in the
formation of a multiple  savings and loan holding company which controls savings
institutions  in more than one  state  if:  (i) the  multiple  savings  and loan
holding company involved controls a savings institution which operated a home or
branch  office in the state of the  institution  to be  acquired  as of March 5,
1987;  (ii) the  acquiror  is  authorized  to  acquire  control  of the  savings
institution  pursuant to the  emergency  acquisition  provisions  of the Federal
Deposit  Insurance  Act;  or (iii)  the  statutes  of the  state  in  which  the
institution to be acquired is located  specifically  permit  institutions  to be
acquired by  state-chartered  institutions or savings and loan holding companies
located in the state  where the  acquiring  entity is  located  (or by a holding
company that controls such state-chartered savings institutions).

     The OTS regulations  permit federal  associations to branch in any state or
states of the United States and its territories.  Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
(i) the federal  association  qualifies as a QTL or as a "domestic  building and
loan  association"  under  ss.7701(a)(19)  of the  Code  and  the  total  assets
attributable  to all branches of the association in the state would qualify such
branches  taken as a whole as a QTL or for treatment as a domestic  building and
loan  association  and (ii) such branch  would not result in (a)  formation of a
prohibited  multi-state  multiple  savings  and loan  holding  company  or (b) a
violation of certain statutory  restrictions on branching by savings association
subsidiaries of banking holding companies.  Federal  associations  generally may
not  establish  new branches  unless the  association  meets or exceeds  minimum
regulatory  capital  requirements.  The OTS will also consider the association's
record of compliance with the Community  Reinvestment  Act of 1977 in connection
with any branch application.

     Under the BHCA,  bank holding  companies  are  specifically  authorized  to
acquire control of any savings association. Pursuant to rules promulgated by the
Federal Reserve Board, owning, controlling or operating a savings institution is
a permissible  activity for bank holding companies,  if the savings  institution
engages only in deposit-taking  activities and lending and other activities that
are permissible for bank holding companies. A bank holding company that controls
a savings institution may merge or consolidate the assets and liabilities of the
savings  institution with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the  appropriate  federal
banking  agency  and the  Federal  Reserve  Board.  The  resulting  bank will be
required to continue to pay assessments to the SAIF at the rates  prescribed for
SAIF members on the deposits attributable to the merged savings institution plus
an annual growth  increment.  In addition,  the transaction must comply with the
restrictions on interstate acquisitions of commercial banks under the BHCA.

                                       25
<PAGE>
                                    TAXATION

FEDERAL TAXATION

     The Company and the Bank file consolidated federal income tax returns.

     Thrift  institutions  are subject to the provisions of the Code in the same
general manner as other corporations. Prior to recent legislation,  institutions
such as  Middlesboro  Federal  which met  certain  definitional  tests and other
conditions  prescribed by the Code benefited from certain  favorable  provisions
regarding their deductions from taxable income for annual additions to their bad
debt  reserve.  For  purposes  of the bad debt  reserve  deduction,  loans  were
separated  into  "qualifying  real property  loans,"  which  generally are loans
secured by interests in certain real property,  and nonqualifying  loans,  which
are  all  other  loans.   The  bad  debt  reserve   deduction  with  respect  to
nonqualifying loans was based on actual loss experience,  however, the amount of
the bad debt reserve  deduction  with respect to qualifying  real property loans
could be based upon  actual  loss  experience  (the  "experience  method")  or a
percentage of taxable  income  determined  without regard to such deduction (the
"percentage of taxable income method").  Recently enacted  legislation  repealed
the  percentage of taxable  income method of  calculating  the bad debt reserve.
Middlesboro Federal historically has elected to use the experience method.

     Earnings appropriated to an institution's bad debt reserve and claimed as a
tax  deduction  are not  available  for the  payment  of cash  dividends  or for
distribution to  shareholders  (including  distributions  made on dissolution or
liquidation),  unless such amount is included in taxable income,  along with the
amount deemed necessary to pay the resulting federal income tax.

     Beginning  with the first taxable year  beginning  after December 31, 1995,
savings  institutions,  such as the Bank, will be treated the same as commercial
banks.  Institutions  with $500  million or more in assets  will only be able to
take a tax deduction when a loan is actually charged off. Institutions with less
than $500 million in assets will still be permitted to make  deductible bad debt
additions to reserves, but only using the experience method.

     Neither the Company's nor Middlesboro  Federal's  federal  corporate income
tax returns have been audited in the last five years.

STATE INCOME TAXATION

     The  Commonwealth of Kentucky  imposes an annual franchise tax on financial
institutions  regularly  engaged in  business in Kentucky at any time during the
calendar  year.  This tax is 1.1% of  Middlesboro  Federal's  net  capital.  For
purposes  of this tax,  net  capital is defined as the  aggregate  of the Bank's
capital stock,  paid-in capital,  retained  earnings and net unrealized gains or
losses on securities  designated as  available-for-sale  less an amount equal to
the five year average of the percentage that the book value of any United States
obligations held by the Bank bears to the book value of the Bank's total assets.
Financial institutions which are subject to tax both within and without Kentucky
must apportion  their net capital.  For the year ended June 30, 2001, the amount
of such expense for Middlesboro Federal was $98,396.

                                       26
<PAGE>
ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

     The  following  table  sets  forth  the  location  and  certain  additional
information regarding the Bank's offices and other material property.
<TABLE>
<CAPTION>
                                                              BOOK VALUE AT                        DEPOSITS AT
                            YEAR          OWNED OR              JUNE 30,         APPROXIMATE        JUNE 30,
                           OPENED          LEASED                 2001         SQUARE FOOTAGE         2001
                           ------          ------                 ----         --------------         ----
<S>                         <C>           <C>                 <C>                   <C>          <C>
MAIN OFFICE:

1431 Cumberland Avenue
Middlesboro, Kentucky       1915            Owned             $ 991,457             11,906       $53,507,494

BRANCH OFFICES:

1501 E. Main Street
Cumberland, Kentucky        1976           Leased                                    1,700        30,304,745

134 Pine Street
Pineville, Kentucky         1997           Leased                                      750         6,822,492

5320 N. Broadway
Fountain City, Tennessee    1998            Owned             1,403,752              8,000        17,962,399
</TABLE>


     The Bank  recently  expanded  its main office by  constructing  an addition
which  increased  its square  footage by 6,000  square  feet.  The  addition was
completed  in  January  1997  and is used to  house  the  Bank's  administrative
offices.

ITEM 3. LEGAL PROCEEDINGS.
-------------------------

     Although  the  Bank,  from  time to time,  is  involved  in  various  legal
proceedings  in the  normal  course of  business,  there are no  material  legal
proceedings  to which the Company,  the Bank or its  subsidiary is a party or to
which their property is subject.

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS.
----------------------------------------------------------

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended June 30, 2001.


                                       27
<PAGE>
                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------

     The Company's  common stock, par value $.01 per share (the "Common Stock"),
is traded on the  over-the-counter  market with quotations available through the
OTC "Electronic  Bulletin  Board" under the symbol "CMBN." Trading  commenced in
April 1997.  The high and low stock  price by quarter for fiscal  years 2000 and
2001 were as follows:
<TABLE>
<CAPTION>
         QUARTER ENDED                          HIGH             LOW
         -------------                          ----             ---
         <S>                                    <C>              <C>
         September 30, 1999                     $ 8.50           $ 8.50
         December 31, 1999                       10.25             7.50
         March 31, 2000                           9.25             6.75
         June 30, 2000                            7.00             5.50
         September 30, 2000                       7.00             6.25
         December 31, 2000                        8.00             5.50
         March 31, 2001                          14.00             5.50
         June 30, 2001                           13.63            13.13
</TABLE>

     No dividends  have been declared  during this period.  As of June 30, 2001,
there were 156 recordholders of the Common Stock.

     Payment  of  dividends  by the  Company is  subject  to  determination  and
declaration by the Board of Directors in accordance  with  applicable  statutory
requirements. Payment of dividends by the Company also depends on the receipt of
dividends  from the Bank,  which is subject to  regulatory  restrictions  on the
payment of dividends.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------------------------------------------------------------------

GENERAL

     The  Company's  principal  business  is that of the Bank.  Therefore,  this
discussion relates primarily to the Bank.

     Middlesboro  Federal is primarily  engaged in attracting  deposits from the
general public and using those and other available sources of funds to originate
loans secured by properties  located in Bell and Harlan Counties in southeastern
Kentucky, Claiborne, Knox and Union Counties in upper east Tennessee and western
Lee County in Virginia. To a lesser extent,  Middlesboro Federal also originates
construction  loans,  multi-family and commercial real estate loans,  commercial
business  loans  and  consumer  loans.  It  also  has a  significant  amount  of
investments  in  mortgage-backed  securities  and United States  Government  and
federal agency obligations.

     The  profitability  of  Middlesboro  Federal  depends  primarily on its net
interest income, which is the difference between interest and dividend income on
its interest-earning assets,  principally loans,  mortgage-backed securities and
investment securities, and interest expense on its interest-bearing deposits and
borrowings.  Middlesboro Federal's net earnings also are dependent,  to a lesser
extent,  on the level of its noninterest  income  (including  servicing fees and
other fees) and its noninterest  expenses,  such as  compensation  and benefits,
occupancy and equipment,  insurance premiums,  and miscellaneous other expenses,
as well as federal income tax expense.

ASSET AND LIABILITY MANAGEMENT

     The ability to maximize net interest  income is largely  dependent upon the
achievement  of a positive  interest  rate spread that can be  sustained  during
fluctuations  in  prevailing  interest  rates.  Interest  rate-sensitivity  is a
measure  of the  difference  between  amounts  of  interest-earning  assets  and
interest-bearing  liabilities  which  either  reprice  or mature  within a given
period of time. The difference,  or the interest rate repricing  "gap," provides
an indication of

                                       28
<PAGE>
the extent to which an  institution's  interest  rate spread will be affected by
changes in  interest  rates.  A gap is  considered  positive  when the amount of
interest  rate-sensitive  assets  exceeds the amount of interest  rate-sensitive
liabilities,   and  is   considered   negative   when  the  amount  of  interest
rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets.
Generally,  during a period of rising  interest  rates,  a  negative  gap within
shorter maturities would adversely affect net interest income,  while a positive
gap within  shorter  maturities  would  result in an  increase  in net  interest
income,  and during a period of falling  interest  rates,  a negative gap within
shorter  maturities  would result in an increase in net interest  income while a
positive gap within shorter maturities would have the opposite effect.

     NET PORTFOLIO  VALUE.  In recent years,  the Bank has measured its interest
rate sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain periods,  based on assumptions
regarding loan prepayment and deposit decay rates formerly  provided by the OTS.
However,  the OTS now  requires  the  computation  of  amounts  by which the net
present value of an  institution's  cash flows from assets,  liabilities and off
balance  sheet items (the  institution's  net portfolio  value,  or "NPV") would
change in the event of a range of assumed changes in market interest rates.  The
OTS also requires the  computation of estimated  changes in net interest  income
over a  four-quarter  period.  These  computations  estimate  the  effect  of an
institution's  NPV and net interest income of instantaneous  and permanent 1% to
3% increases and decreases in market interest rates.

     The following table sets forth the interest rate  sensitivity of the Bank's
net  portfolio  value  as of June 30,  2001  (the  most  recent  date for  which
information  is  available)  in the  event of 1%,  2% and 3%  instantaneous  and
permanent increases and decreases in market interest rates, respectively.  These
changes are set forth below as basis  points,  where 100 basis points equals one
percentage point.
<TABLE>
<CAPTION>
                                   NET PORTFOLIO VALUE                          NPV AS % OF PORTFOLIO VALUE OF ASSETS
      CHANGE             ----------------------------------------               ------------------------------------
      IN RATES           $ AMOUNT        $ CHANGE       % CHANGE                NPV RATIO      BASIS POINT CHANGE
      --------           --------        --------       --------                ---------      --------------------
                                  (DOLLARS IN THOUSANDS)
      <S>                  <C>             <C>               <C>                     <C>                  <C>
      + 300 bp           $   10,298      $  (2,006)        (16)%                   8.35%                (126) bp
      + 200 bp               11,135         (1,169)         (9)%                   8.91%                 (70) bp
      + 100 bp               11,816           (488)         (4)%                   9.33%                 (28) bp
          0 bp               12,304                                                9.61%
     -  100 bp               12,462            158           1%                    9.65%                   4  bp
     -  200 bp               12,553            249           2%                    9.64%                   3  bp
     -  300 bp               12,646            342           3%                    9.63%                   2  bp
</TABLE>

                                       29
<PAGE>

     The following table sets forth the interest rate risk capital component for
the Bank at June 30,  2001 given a  hypothetical  200 basis point rate change in
market interest rates.

                                                                       AT
                                                                   JUNE 30, 2001
                                                                   -------------

Pre-shock NPV Ratio: NPV as % of Portfolio Value of Assets ..........   9.61%
Exposure Measure: Post-Shock NPV Ratio ..............................   8.91%
Sensitivity Measure: Change in NPV Ratio ............................   70 bp

     Computations of prospective  effects of hypothetical  interest rate changes
are based on numerous assumptions,  including relative levels of market interest
rates, loan prepayments and deposit  run-offs,  and should not be relied upon as
indicative of actual results.  Further,  the computations do not contemplate any
actions the Bank may undertake in response to changes in interest rates.

     Certain  shortcomings  are inherent in the method of analysis  presented in
both the  computation  of NPV and in the  analysis  presented  in  prior  tables
setting  forth  the  maturing  and  repricing  of  interest-earning  assets  and
interest-bearing   liabilities.   For  example,   although  certain  assets  and
liabilities may have similar maturities or periods to repricing,  they may react
in differing  degrees to changes in market interest rates. The interest rates on
certain types of assets and  liabilities  may fluctuate in advance of changes in
market  interest  rates,  while  interest  rates on other  types may lag  behind
changes in market rates.  Additionally,  certain assets, such as adjustable-rate
loans,  which  represent the Bank's  primary loan product,  have features  which
restrict  changes in interest  rates on a short-term  basis and over the life of
the asset. In addition,  the proportion of  adjustable-rate  loans in the Bank's
portfolios  could decrease in future periods if market  interest rates remain at
or decrease  below current  levels due to refinance  activity.  Further,  in the
event of a change in interest  rates,  prepayment  and early  withdrawal  levels
would likely deviate  significantly  from those assumed in the tables.  Finally,
the ability of many borrowers to service their adjustable-rate debt may decrease
in the event of an interest rate increase.

     The lending activities of savings institutions have historically emphasized
long-term, fixed-rate loans secured by single-family residences, and the primary
source of funds of such institutions has been deposits.  The deposit accounts of
savings associations generally bear interest rates that reflect market rates and
largely mature or are subject to repricing  within a short period of time.  This
factor,  in combination  with substantial  investments in long-term,  fixed-rate
loans,  has  historically  caused the income earned by savings  associations  on
their loan  portfolios  to adjust more slowly to changes in interest  rates than
their cost of funds.

     Middlesboro Federal originates both fixed- and adjustable-rate  residential
real estate loans as market conditions dictate. Prior to the 1980s,  Middlesboro
Federal,  like virtually all savings  associations,  originated  only fixed-rate
loans and held them in  portfolio  until  maturity.  As a result of the problems
caused  by  holding  fixed-rate  loans  in a  rapidly  increasing  interest-rate
environment,  changes  in  regulations  to allow  for  variable-rate  loans  and
consumer   demand  for  such  loans  during  periods  of  high  interest  rates,
Middlesboro  Federal  began to transform  its  portfolio  into loan products the
interest rates of which adjust  periodically.  As a result, 66.6% of Middlesboro
Federal's  loan  portfolio,  as of June 30,  2001  consisted  of  adjustable  or
floating rate loans.

     Notwithstanding  the  foregoing,  however,  because  Middlesboro  Federal's
interest-bearing  liabilities  which  mature or  reprice  within  short  periods
substantially exceed its earning assets with similar  characteristics,  material
and prolonged  increases in interest rates generally would adversely  affect net
interest  income,  while  material and  prolonged  decreases  in interest  rates
generally,  but to a lesser  extent  because of their  historically  low levels,
would have the opposite effect.


                                       30
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

     The  following  table  sets  forth  certain  information  relating  to  the
Company's  average  balance  sheet and reflects the average  yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing  income or expense by the average  monthly balance of assets
or liabilities,  respectively,  for the periods presented.  Average balances for
loans include  nonaccrual  loans.  Average  balances are derived from  month-end
balances. Management does not believe that the use of month-end balances instead
of  daily  balances  has  caused  any  material  difference  in the  information
presented.
<TABLE>
<CAPTION>
                                                                      YEAR ENDED JUNE  30,
                                               ------------------------------------------------------------------------
                                                            2001                                       2000
                                               ---------------------------------       --------------------------------
                                               AVERAGE                   AVERAGE       AVERAGE                  AVERAGE
                                               BALANCE      INTEREST      RATE         BALANCE       INTEREST     RATE
                                               --------     ---------    -------       -------       --------   -------
                                                                             (DOLLARS IN THOUSANDS)
<S>                                            <C>          <C>          <C>           <C>           <C>          <C>
INTEREST INCOME
  Loans
    Consumer................................   $  9,605     $     968    10.08%        $  13,901     $ 1,390      10.00%
    Other...................................      8,868           762     8.59             9,874         796       8.06
    Mortgage................................     88,103         7,299     8.28            85,977       7,090       8.25
                                               --------     ---------                  ---------     -------
     Total loans............................    106,576         9,029     8.47           109,752       9,276       8.45
                                               --------     ---------                  ---------     -------
  Mortgage-backed securities................      2,041           114     5.59             3,028         183       6.04
  Investment securities.....................      3,449           335     9.71             3,966         247       6.23
  FHLB stock................................        982            70     7.13             1,369         119       8.69
                                               --------     ---------                  ---------     -------
  Total interest-earning assets.............    113,048         9,548     8.45           118,115       9,825       8.32
                                                            ---------                                -------
  Non-interest-earning assets...............     11,693                                   11,015
                                               --------                                ---------
     Total assets...........................   $124,741                                $ 129,130
                                               ========                                =========

INTEREST EXPENSE
  Savings deposits..........................   $  7,347     $     164     2.23         $   8,117     $   179       2.21
  Certificates of deposit...................     87,492         5,041     5.76            85,742       4,620       5.39
  Demand, NOW and money market..............     12,581           209     1.66            13,174         235       1.78
                                               --------     ---------                  ---------     -------
       Total deposits.......................    107,420         5,414     5.04           107,033       5,034       4.70
  Funds borrowed............................      7,893           709     8.98            12,911         825       6.39
                                               --------     ---------                  ---------     -------
Total interest-bearing liabilities..........    115,313         6,123     5.31           119,944       5,852       4.88
                                                            ---------                                -------
Other non-interest-bearing liabilities......        605                                      275
Total stockholders' equity..................      8,823                                    8,911
                                               --------                                ---------
     Total liabilities and stockholders'
       equity...............................   $ 124,741                                $129,130
                                               =========                                ========

Net interest income.........................                $   3,425                                $ 3,973
                                                            =========                                =======
Interest rate spread........................                              3.14%                                    3.44%
                                                                         =====                                    =====
Net yield on interest-earning assets........                              3.03%                                    3.36%
                                                                         =====                                    =====
Ratio of average interest-earning assets to
  average interest-bearing liabilities......      98.04%                                    98.48%
                                               ========                                ==========
</TABLE>

                                       31
<PAGE>
RATE/VOLUME ANALYSIS

     The table  below  sets  forth  certain  information  regarding  changes  in
interest income and interest  expense of the Company for the periods  indicated.
For each  category of  interest-earning  asset and  interest-bearing  liability,
information  is  provided  on changes  attributable  to:  (i)  changes in volume
(changes in volume  multiplied by old rate); and (ii) changes in rate (change in
rate  multiplied  by old  volume).  Changes  in  rate-volume  (changes  in  rate
multiplied by the changes in volume) have been allocated proportionately between
changes  in rate and  changes in volume at the basis of the  absolute  values of
changes in rate and changes in volume.
<TABLE>
<CAPTION>
                                                                  YEAR ENDED JUNE 30,
                                         -------------------------------------------------------------------
                                           2001     VS.       2000               2000      VS.       1999
                                         -----------------------------        ------------------------------
                                                INCREASE (DECREASE)               INCREASE (DECREASE)
                                                     DUE TO                               DUE TO
                                         -----------------------------        ------------------------------
                                         RATE        VOLUME      TOTAL        RATE        VOLUME      TOTAL
                                         -----       ------      -----        ----        ------      ------
                                                                    (IN THOUSANDS)
<S>                                     <C>         <C>        <C>          <C>         <C>         <C>
Interest income:
  Loans:
    Consumer..........................  $     11    $   (433)  $   (422)    $    (49)   $   (621)   $   (670)
    Other.............................        52         (86)       (34)         (65)        395         330
    Mortgage..........................        26         183        209         (367)         24        (343)
  Mortgage-backed securities..........       (14)        (55)       (69)           8         (85)        (77)
  Investment securities...............       138         (50)        88          (27)         47          20
  FHLB stock..........................       (28)        (21)       (49)          22         (25)         (3)
                                        --------    --------   --------     --------    --------    --------
      Total interest income...........       185        (462)      (277)        (478)       (265)       (743)
                                        --------    --------   --------     --------    --------    --------
Interest expense:
  Savings deposits....................         2         (17)       (15)         (18)        (11)        (29)
  Certificates of deposit.............       317         104        421         (227)        125        (102)
  Demand, NOW and money market........       (16)        (10)       (26)          (5)         15          10
  Funds borrowed......................       334        (450)      (116)          94        (434)       (340)
                                        --------    --------   --------     --------    --------    --------
      Total interest expense..........       637        (373)       264         (156)       (305)       (461)
                                        --------    --------   --------     --------    --------    --------
Change in net interest income.........  $   (452)   $    (89)  $   (541)    $   (322)   $     40    $   (282)
                                        ========    ========   ========     ========-   ========    ========-
</TABLE>

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2001 AND 2000

     The Company's total assets decreased by $2.5 million, or 1.95%, from $128.2
million at June 30, 2000 to $125.7  million at June 30,  2001.  The  decrease in
assets was principally  due to a decrease in the overall loan  portfolio.  Gross
loans at June 30, 2001 totaled  $99.9  million as compared to $111.3  million at
June 30, 2000, with the $11.4 million or 10.24% decrease primarily  attributable
to  decreases  in the  Bank's  overall  portfolio.  Mortgage-backed  securities,
designated  as available  for sale,  also declined by $1.5 million or 57.7% from
$2.6 million at June 30, 2000 to $1.1  million at June 30, 2001.  The decline in
the  balance of  mortgage-backed  securities  classified  as  available-for-sale
reflects principal repayments on these securities.  These changes were decreases
of  $888,008,  or 58.3%,  in other  real  estate  owned,  $128,386,  or 7.69% in
property held for investment and $1,956,647, or 54.24%, in investment securities
designated  as  available-for-sale.  The  increase  in other real  estate  owned
reflects an increase in loan  collection  efforts.  The  increase in  investment
securities was due to reinvestment of matured mortgage-backed securities.

     Total  liabilities  amounted to $117.2 million at June 30, 2001,  down from
$119.1 million at June 30, 2000. The $1.9 million  decrease was  attributable to
repayments of advances from the FHLB.  Total  deposits were  comparable  year to
year, increasing by only $2.2 million, or 2.14%, from $106.1 million at June 30,
2000 to $108.3 million at June 30, 2001.

     Total stockholders'  equity decreased by $700,000 from $9.1 million at June
30, 2000 to $8.4 million at June 30, 2001.  This  decrease was due  primarily to
net loss for the year.

                                       32
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2001 AND 2000

     NET INCOME.  For the year ended June 30, 2001,  the Company  incurred a net
loss of $878,000 as compared to net income of $477,000 for the fiscal year ended
June 30, 2000. This represented a decrease of $1.4 million. The decrease was due
to the combined effects of a $1.3 million, or 628.43%, increase in the provision
for loan losses and a $548,000,  or 13.80%,  reduction in net  interest  income,
partially offset by a $715,000 decrease in the provision for income taxes.

     NET INTEREST  INCOME.  Net interest income  decreased by $548,000 from $4.0
million for the year ended June 30, 2000 to $3.4 million for the year ended June
30, 2001. The decrease was attributable to the combined effects of a decrease in
interest income as a result of the decreased  level of average  interest-earning
assets in fiscal year 2001 as compared to fiscal year 2000 and a decrease in the
average yield on interest  earning  expenses and an increase in interest expense
due to 43 basis  point  increase in the  average  rate paid on interest  bearing
liabilities.  Average  interest-earning  assets  amounted to $113.0  million for
fiscal  year 2001 as  compared  to $118.1  million  for  fiscal  year 2000 for a
decrease of $5.1 million.  This decrease was  attributable to reductions in both
the Bank's loan portfolio and its mortgage-backed  securities portfolio.  During
fiscal year 2001,  the Bank's loan growth  slowed  substantially  as compared to
prior years primarily due to management's efforts to strengthen the portfolio by
tightening  underwriting  standards and collection  efforts as well as increased
competition from secondary market originators.

     INTEREST  INCOME.  Interest  income totaled $9.5 million for the year ended
June 30, 2001, a decrease of $277,000,  or 2.82%,  from fiscal year 2000's level
of $9.8 million. The decrease resulted primarily from a reduction in the average
balance of consumer loans from $13.9 million in fiscal year 2000 to $9.6 million
in fiscal year 2000.  Interest income from consumer loans decreased by $422,000.
Partially  offsetting  this  decrease  was an increase  in interest  income from
mortgage loans of $209,000 from $7.1 million for the year ended June 30, 2000 to
$7.3  million for the year ended June 30, 2001 due  primarily  to an increase in
the average  balance of the mortgage loan portfolio  and, to a lesser extent,  a
three basis point  increase in the  average  rate  received on such loans.  Also
contributing  to the  decline  in  interest  income was a $69,000  reduction  in
interest income from mortgage-backed  securities reflecting a $987,000 reduction
in the average balance of these  securities  during fiscal year 2001 as compared
to fiscal year 2000 and a 45 basis point  decrease in the average rate  received
year-to year.

     INTEREST EXPENSE.  Total interest expense for fiscal year 2001 increased by
$264,000  or 4.51% to $6.1  million  as  compared  to $5.9  million in the prior
fiscal year due to an increase in interest  expense on  certificates of deposit.
Interest  expense on deposits  amounted to $5.4 million in fiscal year 2001,  up
from $5.0 million in fiscal year 2000 with the increase  primarily  attributable
to increased  interest  expense on  certificates  of deposit due to the combined
effects of an increase in the average  balance of such deposits  outstanding and
in the  average  rate  paid.  In  fiscal  year  2001,  the  average  balance  of
certificates  of deposit  outstanding  amounted to $87.5 million,  up from $85.7
million  in  fiscal  year  2000  while  the  average  rate  paid  on the  Bank's
certificates  of deposit  increased  from 5.39% in fiscal  year 2000 to 5.76% in
fiscal year 2001. The increase in the average balance of certificates of deposit
was primarily  due to the payment of interest  while the increase in the average
rate paid reflects increased competition within the Bank's market area. Interest
expense on short term  borrowings  declined by $116,000  from $825,000 in fiscal
year  2000 to  $709,000  in  fiscal  year  2001.  This  decrease  was  primarily
attributable to a reduction in the average balance of such borrowings from $12.9
million for fiscal year 2000 to $8.0 million for fiscal year 2001.

     PROVISION  FOR LOAN  LOSSES.  Provisions  for loan  losses  are  charged to
earnings to bring the total  allowance  for loans  losses to a level  considered
adequate  by  management  to  provide  for  loan  losses  based  on  prior  loss
experience, volume and type of lending conducted by the Bank, industry standards
and past due loans in the  Bank's  loan  portfolio.  Management  also  considers
general economic  conditions and other factors related to the  collectibility of
the Bank's loan  portfolio.  The  provision  for loan losses  increased  by $1.3
million,  or 628.43%  from  $206,000  for the year  ended June 30,  2000 to $1.5
million for the year ended June 30, 2001.  The  increased  provision  was deemed
necessary by the Bank due to the increase in nonperforming and classified loans.
The  allowance for loan losses as a percentage of gross loans at fiscal year end
2001 was 1.037% as compared to 0.93% at fiscal year end 2000.

     NONINTEREST INCOME.  Noninterest income totaled $652,000 for the year ended
June 30,  2001, a decrease of $184,000,  or 22.01%,  from  $836,000 for the year
ended June 30, 2000 due to the decreased level of loan  originations  during the
2001 period,  a net loss on the sale of repossessed  assets as well as a decline
in  gains  from  the

                                       33
<PAGE>
sale of property.  Due to the decreased  level of loan  originations  during the
period, loan fees and other service charges declined by $93,000, or 12.00%, to a
total of $685,000  for the year ended June 30, 2001 as compared to $778,000  for
the year ended June 30, 2000.

     NONINTEREST  EXPENSE.  Noninterest  expense  increased by $44,000 or 1.14%,
from $3.8  million for the year ended June 30, 2000 to $3.9 million for the year
ended June 30, 2001. Other noninterest  expenses increased by $114,000 or 11.82%
from  $965,000  in fiscal  year 2000 to $1.1  million in fiscal year 2001 due to
increased legal and other expenses associated with the Company's negotiation and
execution of an Agreement and Plan of Share Exchange with  Commercial.  Salaries
and employee benefit expenses increased by $15,000,  or 0.90%, from $1.7 million
for fiscal  year 2000 to $1.7  million  for  fiscal  year  2001.  Occupancy  and
equipment  expense  declined by $17,000,  or 2.79% during  fiscal year 2001 from
$623,000  during  fiscal year 2000 to $606,000 with the decrease due to decrease
in depreciation expense.

     INCOME TAX EXPENSE.  Income tax expense decreased by $715,000 from $286,000
for fiscal  year 2000 to a net benefit of  $429,000  for fiscal  year 2001.  The
decrease  in income  tax  expense  is due  directly  to the  decreased  level of
earnings  during fiscal year 2001. The effective tax rates for fiscal years 2000
and 2001 were 34%. The variations in the effective tax rate are  attributable to
the  composition  of the income base, the amount of tax exempt income and timing
differences related to the deferred compensation arrangements.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2000 AND 1999

     NET INCOME.  For the year ended June 30,  2000,  the  Company's  net income
amounted to  $449,000 as compared to a net loss of $355,000  for the fiscal year
ended June 30, 1999. This represented an increase of $804,000.  The increase was
due to the  combined  effects of a $1.3  million,  or 86.49%,  reduction  in the
provision for loan losses and a $224,000,  or 5.47%,  reduction in  non-interest
expense,  partially  offset by a $283,000,  or 6.66%  decrease  in net  interest
income and a $60,000, or 6.79%, decrease in non interest income.

     NET INTEREST  INCOME.  Net interest income  decreased by $283,000 from $4.2
million for the year ended June 30, 1999 to $4.0 million for the year ended June
30, 2000. The decrease was attributable to the combined effects of a decrease in
interest income as a result of the decreased  level of average  interest-earning
assets in fiscal year 2000 as compared to fiscal year 1999 and a decrease in the
average yield on interest earning expenses, partially offset by declines in both
the  average  balance of  interest-bearing  liabilities  and a  decrease  in the
average cost associated with such liabilities.  Average  interest-earning assets
amounted to $118.1  million  for fiscal year 2000 as compared to $120.5  million
for  fiscal  year  1999  for a  decrease  of $2.3  million.  This  decrease  was
attributable   to  reductions  in  both  the  Bank's  loan   portfolio  and  its
mortgage-backed  securities portfolio.  During fiscal year 2000, the Bank's loan
growth  slowed  substantially  as  compared  to  prior  years  primarily  due to
management's  efforts to strengthen  the  portfolio by  tightening  underwriting
standards and collection efforts as well as increased competition from secondary
market originators.

     INTEREST  INCOME.  Interest  income totaled $9.8 million for the year ended
June 30, 2000, a decrease of $744,000,  or 7.04%,  from fiscal year 1999's level
of $10.6  million.  The  decrease  resulted  primarily  from a reduction  in the
average balance of other loans,  primarily  unsecured  consumer loans from $19.9
million in fiscal year 1999 to $13.9 million in fiscal year 1999 as well as a 35
basis point decrease in the average yield on this portfolio. Due to the combined
effects of these changes, interest income from unsecured consumer and commercial
loans  decreased by $340,000.  Interest income from mortgage loans also declined
by $343,000  from $7.4  million for the year ended June 30, 1999 to $7.1 million
for the year ended June 30, 2000,  as an increase in the average  balance of the
mortgage loan portfolio was more than offset by a 42 basis point decrease in the
average  rate  received  on such  loans.  Also  contributing  to the  decline in
interest income was a $77,000 reduction in interest income from  mortgage-backed
securities  reflecting a $1.5 million  reduction in the average balance of these
securities  during  fiscal year 2000 as compared to fiscal year 1999,  partially
offset by a 27 basis point increase in the average rate received year-to year.

     INTEREST EXPENSE.  Total interest expense for fiscal year 2000 decreased by
$461,000  or 7.29% to $5.9  million  as  compared  to $6.3  million in the prior
fiscal  year,   increased  interest  expense  on  certificates  of  deposit  was
substantially  offset  by a  reduction  in  interest  expense  from  short  term
borrowings. Interest expense on deposits amounted to $5.0 million in fiscal year
2000,  down from $5.2  million in fiscal year 1999 with the  decrease  primarily

                                       34
<PAGE>
attributable  to decreased  interest  expense on  certificates  of deposit as an
increase  in the  average  balance of such  deposits  outstanding  was more than
offset by a decrease in the average rate paid. In fiscal year 2000,  the average
balance of certificates  of deposit  outstanding  amounted to $85.7 million,  up
from $83.5 million in fiscal year 1999 while the average rate paid on the Bank's
certificates  of deposit  decreased  from 5.65% in fiscal  year 1999 to 5.39% in
fiscal year 2000. The increase in the average balance of certificates of deposit
was due to the  additional  certificates  opened in the new Fountain City branch
while the decrease in the average rate paid reflects the Bank's  decision not to
offer any premium deposit rates in fiscal year 2000.  Interest  expense on short
term  borrowings  declined by $340,000  from $1.2 million in fiscal year 1999 to
$865,000 in fiscal year 2000.  This  decrease was  primarily  attributable  to a
reduction  in the  average  balance of such  borrowings  from $20.6  million for
fiscal year 1999 to $12.9 million for fiscal year 2000.

     PROVISION  FOR LOAN  LOSSES.  Provisions  for loan  losses  are  charged to
earnings to bring the total  allowance  for loans  losses to a level  considered
adequate  by  management  to  provide  for  loan  losses  based  on  prior  loss
experience, volume and type of lending conducted by the Bank, industry standards
and past due loans in the  Bank's  loan  portfolio.  Management  also  considers
general economic  conditions and other factors related to the  collectibility of
the Bank's loan  portfolio.  The  provision  for loan losses  decreased  by $1.3
million,  or 86.56%  from  $1.5  million  for the year  ended  June 30,  1999 to
$206,000 for the year ended June 30, 2000.  The  decreased  provision was deemed
necessary  by the Bank  due to  additional  chargeoffs  in 2000  resulting  in a
reduction of substandard loans. The allowance for loan losses as a percentage of
gross loans at fiscal year end 2000 was 0.93% as compared to1.32% at fiscal year
end 1999.

     NONINTEREST INCOME.  Noninterest income totaled $824,000 for the year ended
June 30, 2000, a decrease of $60,000, or 6.79%, from $884,000 for the year ended
June 30, 1999 due to the decreased  level of loan  originations  during the 2000
period,  a net loss on the sale of  repossessed  assets as well as a decline  in
gains from the sale of investment securities.  During fiscal year 1999, the Bank
realized  a net  gain of  $18,000  from  the sale of  investment  securities  as
compared  to a net loss of $313 from the sale of  investment  securities  during
fiscal year 2000. In addition,  due to the decreased level of loan  originations
during the period,  loan fees and other service charges declined by $10,000,  or
1.16%,  to a total of  $778,000  for the year ended June 30, 2000 as compared to
$789,000 for the year ended June 30, 1999.

     NONINTEREST  EXPENSE.  Noninterest  expense decreased by $224,000 or 5.47%,
from $4.1  million for the year ended June 30, 1999 to $3.9 million for the year
ended June 30, 2000. Salaries and employee benefit expenses declined by $37,000,
or 2.13%, from $1.8 million for fiscal year 1999 to $1.7 million for fiscal year
2000. The decrease was primarily  attributable  to a decline in ESOP expense and
cost  control  efforts.  For the fiscal  year ended June 30,  2000,  the Company
recognized a $75,000 expense as a result of the release of shares for allocation
to  participants  under the Company's ESOP as compared to a $208,000  expense in
fiscal year 1999.  The Company makes annual  contributions  to the ESOP equal to
the ESOP's  debt  service.  As the debt is  repaid,  shares  are  released  from
collateral  and allocated to active  employees  based on the  proportion of debt
service  paid  during the year.  As shares are  released  from  collateral,  the
Company  reports  compensation  expense  equal to the  current  market  value of
shares. Occupancy and equipment expense rose by $61,000, or 10.84% during fiscal
year 2000 from  $562,000  during  fiscal year 1999 to $623,000 with the increase
due to an increase due to the additional  expenses associated with the operation
of the new branch in Fountain City, Tennessee.

     INCOME TAX EXPENSE.  Income tax expense  increased  by $395,000  from a net
benefit of $124,000  for fiscal  year 1999 to an expense of $271,000  for fiscal
year 2000.  The increase in income tax expense is due directly to the  increased
level of earnings  during  fiscal year 2000.  The effective tax rates for fiscal
years  2000 and  1999  were 34% and 34%,  respectively.  The  variations  in the
effective tax rate are  attributable  to the composition of the income base, the
amount of tax  exempt  income  and timing  differences  related to the  deferred
compensation arrangements.

LIQUIDITY AND CAPITAL RESOURCES

     The  Company  currently  has no business  other than that of the Bank.  The
Company's assets consist almost entirely of its investments in the Bank. To fund
any future  dividend  payments by the Company or to provide funds for activities
at the Company  level,  the Company would be dependent  upon  dividends from the
Bank. The Bank is subject to certain regulatory  limitations with respect to the
payment of dividends to the Company. At June 30, 2001,

                                       35
<PAGE>

the Bank did not have any net income  available  for the payment of dividends by
the  Bank to the  Company  under  these  regulations.  An  application  would be
required to be filed and approved prior to the payment of any dividends.

     The Bank is  required by OTS  regulations  to  maintain  minimum  levels of
specified liquid assets which are consistent with safe and sound operation.  The
Bank's average liquidity ratio was 15.22% at June 30, 2001.

     The Bank's  principal  sources of funds for  investments and operations are
net income,  deposits  from its primary  market  area,  principal  and  interest
payments on loans and  mortgage-backed  securities  and proceeds  from  maturing
investment securities. Its principal funding commitments are for the origination
or  purchase  of loans  and the  payment  of  maturing  deposits.  Deposits  are
considered  a  primary  source  of  funds  supporting  the  Bank's  lending  and
investment  activities.  Deposits were $108.3 million and $106.1 million at June
30, 2001 and 2000, respectively.

     The Bank's most liquid assets are cash and cash equivalents, which are cash
on  hand,  amounts  due  from  financial   institutions,   federal  funds  sold,
certificates of deposit with other financial  institutions that have an original
maturity of three months or less and money market  mutual  funds.  The levels of
such assets are  dependent on the Bank's  operating,  financing  and  investment
activities at any given time. The Bank's cash and cash equivalents totaled $14.6
million and $1.6 million at June 30, 2001 and 2000, respectively. The variations
in levels of cash and cash  equivalents  are  influenced  by  deposit  flows and
anticipated future deposit flows.

     At June 30, 2001,  Middlesboro Federal had $1.390 million in commitments to
originate loans. At June 30, 2001, the Bank had $58.9 million in certificates of
deposit which were  scheduled to mature in one year or less.  It is  anticipated
that the majority of these  certificates will be renewed in the normal course of
operations.

     Middlesboro  Federal is not aware of any trends or uncertainties  that will
have  or are  reasonably  expected  to  have a  material  effect  on the  Bank's
liquidity  or  capital  resources.  The Bank has no current  plans for  material
capital improvements or other capital expenditures that would require more funds
than are currently on hand.

ACCOUNTING PRONOUNCEMENTS

     ACCOUNTING   FOR   TRANSFERS   AND   SERVICING  OF  FINANCIAL   ASSETS  AND
EXTINGUISHMENT OF LIABILITIES. The FASB has issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and  Extinguishment of Liabilities",
which is effective for the Company's  fiscal year beginning  July 1, 1997.  SFAS
125 provides standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings.  The impact of the adoption of
SFAS 125 upon the results of operations of the Company was not material.

     ACCOUNTING FOR IMPAIRMENT OF LOANS.  The Company's  measurement of impaired
loans  includes those loans which are  performing  according to all  contractual
terms of the loan  agreement  but may have  substantive  indication of potential
credit weakness. As of June 30, 2001, $876,000 of loans were considered impaired
by the Company and carried on a non-accrual basis. These loans were measured for
impairment  using the fair value of collateral or using the present value of the
expected  future cash flows  discounted  at the loan's  effective  rate. If as a
result of these measurements, any loans required valuation allowances, they were
included  within  the  overall  allowance  for loan  losses  at June  30,  2001.
Residential  mortgages and consumer  loans and leases  outside the scope of SFAS
114 are collectively evaluated for impairment.

     ACCOUNTING  FOR IMPAIRMENT OF LONG-LIVED  ASSETS.  The FASB issued SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to be Disposed Of," which was  effective  for the  Company's  fiscal year
beginning July 1, 1996. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used be reviewed for impairment whenever
events or changes in circumstances  indicate the carrying amount of an asset may
not be recoverable. If the sum of the expected future cash flows from the use of
the asset and its eventual  disposition is less than the carrying  amount of the
asset, an impairment loss is recognized. SFAS No. 121 also requires that certain
assets to be disposed of be measured at the lower of carrying  amount or the net
realizable value. The impact of adopting SFAS 121 upon the results of operations
of the Company was not material.

                                       36
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES

     The  financial  statements  and  related  data  presented  herein have been
prepared in accordance  with  generally  accepted  accounting  principles  which
require the measurement of financial  position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.

     Unlike  most   companies,   the  assets  and  liabilities  of  a  financial
institution are primarily monetary in nature. As a result, interest rates have a
more  significant  impact  on a  financial  institution's  performance  than the
effects of general levels of inflation.  Interest rates do not necessarily  move
in the  same  direction  or in the same  magnitude  as the  price  of goods  and
services,  since such prices are affected by inflation.  In the current interest
rate environment,  liquidity and the maturity  structure of the Company's assets
and  liabilities  are  critical to the  maintenance  of  acceptable  performance
levels.

ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                            Page

         Independent Auditor's Opinion.......................................38

         Consolidated Statements of Financial Condition
         as of June 30, 2001, 2000 and 1999..................................39

         Consolidated Statements of Income
         for the Years Ended June 30, 2001, 2000 and 1999....................40

         Consolidated Statements of Stockholders' Equity
         for the Years Ended June 30, 2001, 2000 and 1999....................42

         Consolidated Statements of Cash Flows
         for the Years Ended June 30, 2001, 2000 and 1999....................43

         Notes to the Consolidated Financial Statements......................45


                                       37
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT
                          ----------------------------

August 16, 2001



To the Board of Directors and Stockholders
Cumberland Mountain Bancshares, Inc. and Subsidiaries
Middlesboro, Kentucky


We have audited the accompanying  consolidated statements of financial condition
of Cumberland  Mountain  Bancshares,  Inc. and Subsidiaries as of June 30, 2001,
2000 and 1999,  and the related  consolidated  statements of income,  changes in
stockholders'  equity and cash flows for the years then ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted  our audits in accordance  with U.S.  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Cumberland Mountain Bancshares,
Inc. and  Subsidiaries  as of June 30, 2001,  2000 and 1999,  and the results of
their  operations  and their cash  flows for the years then ended in  conformity
with U.S. generally accepted accounting principles.

As discussed in Note 27 to the financial  statements,  certain errors  regarding
the Company's ESOP computations  resulted in changes to the years ended June 30,
1998, 1999 and 2000.  Accordingly,  the 1999 and 2000 financial  statements have
been  restated and an adjustment  has been made to retained  earnings as of June
30, 1998 to correct the errors.




/s/ Marr, Miller, Myers, PSC

Certified Public Accountants


                                       38
<PAGE>
              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                    June 30,

<TABLE>
<CAPTION>
                                     ASSETS
                                     ------
                                                              2001           2000           1999
                                                              ----           ----           ----
<S>                                                      <C>            <C>            <C>
Cash and cash equivalents                                $ 14,599,125   $  1,580,568   $  1,316,809
Other investments, at market value                            285,000        180,000        195,000
Investment securities, available for sale, at market
  value                                                     1,650,738      3,607,385      3,302,281
Mortgage-backed securities, available for sale, at
 market value                                               1,143,080      2,625,643      3,579,133
Loans, net of allowance for loan losses of $1,035,712,
 $1,031,805 and $1,575,761 at June 30, 2001, 2000
 and 1999,  respectively                                   98,829,057    109,610,362    111,612,055
Accrued interest receivable                                   743,795        809,289        934,094
Federal Home Loan Bank (FHLB) stock                           998,800        928,600      1,810,300
Other real estate owned                                       635,160      1,523,168        739,342
Premises and equipment, net                                 3,794,682      4,263,097      4,586,533
Property held for investment                                1,540,311      1,668,697      1,235,497
Other assets                                                1,509,762      1,377,858        788,682
                                                         ------------   ------------   ------------

                            TOTAL ASSETS                 $125,729,510   $128,174,667   $130,099,726
                                                         ============   ============   ============
<CAPTION>
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
                                                             2001              2000             1999
                                                             ----              ----             ----
<S>                                                      <C>              <C>              <C>
LIABILITIES
    Deposits                                             $ 108,343,734    $ 106,077,913    $ 106,905,137
    Advances from FHLB                                       5,000,000       10,500,000       12,000,000
    Notes payable                                            2,892,738        1,444,083        1,641,333
    Accrued interest payable                                   249,928          192,357          136,689
    Other liabilities                                          758,477          799,096          667,245
                                                         -------------    -------------    -------------
        Total liabilities                                  117,244,877      119,013,449      121,350,404
                                                         -------------    -------------    -------------

OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
    Common stock, .01 par value, 8,000,000 shares
      authorized, 679,620 shares issued and
      outstanding at June 30, 2001                               6,788            6,788            6,788
    Treasury stock, 5,200 shares outstanding at
      June 30, 1999, at cost                                        --               --          (87,750)
    Unearned MRP shares                                       (101,638)        (101,638)              --
    Unearned stock options                                    (328,668)        (328,668)        (240,918)
    Unearned ESOP shares                                      (591,855)        (690,497)        (789,139)
    Preferred stock, 2,000,000 shares authorized, none
      issued and outstanding                                        --               --               --
    Paid-in capital                                          5,550,307        5,536,771        5,571,900
    Retained earnings                                        4,010,240        4,888,540        4,411,771
    Net unrealized gain (loss) on available for sale
      securities, net of tax effect                            (60,541)        (150,078)        (123,330)
                                                         -------------    -------------    -------------
        Total stockholders' equity                           8,484,633        9,161,218        8,749,322
                                                         -------------    -------------    -------------

                        TOTAL LIABILITIES AND
                        STOCKHOLDERS' EQUITY             $ 125,729,510    $ 128,174,667    $ 130,099,726
                                                         =============    =============    =============

</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
                                       39
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                        CONSOLIDATED STATEMENTS OF INCOME
                              Years Ended June 30,
<TABLE>
<CAPTION>
                                                             2001            2000            1999
                                                             ----            ----            ----
<S>                                                     <C>             <C>             <C>
INTEREST INCOME
    Loans                                               $  9,028,632    $  9,276,425    $  9,959,048
    Mortgage-backed securities                               113,846         183,016         260,314
    Investment securities and other interest-earning
      assets                                                 334,810         246,529         226,441
    FHLB stock                                                70,308         118,536         122,420
                                                        ------------    ------------    ------------
        Total interest income                              9,547,596       9,824,506      10,568,223

INTEREST EXPENSE                                           6,123,117       5,851,926       6,305,321
                                                        ------------    ------------    ------------

NET INTEREST INCOME                                        3,424,479       3,972,580       4,262,902

PROVISION FOR LOAN LOSSES                                  1,500,128         205,940       1,524,416
                                                        ------------    ------------    ------------

NET INTEREST INCOME AFTER PROVISION FOR
  LOAN LOSSES                                              1,924,351       3,766,640       2,738,486
                                                        ------------    ------------    ------------

NONINTEREST INCOME
    Loan fees and service charges                            685,039         778,456         788,696
    Net gain (loss) on sales of investment securities             --            (313)         18,338
    Net gain (loss) on sales of property                       4,313          61,325          34,633
    Net gain (loss) on sales of repossessed assets          (100,652)        (61,169)         19,001
    Other                                                     63,312          57,762          23,727
                                                        ------------    ------------    ------------
        Total noninterest income                             652,012         836,061         884,395
                                                        ------------    ------------    ------------

NET INTEREST AND OTHER INCOME                              2,576,363       4,602,701       3,622,881
                                                        ------------    ------------    ------------

NONINTEREST EXPENSE
    Salaries and employee benefits                         1,688,103       1,672,925       1,620,678
    Data processing                                          239,999         233,024         204,288
    SAIF deposit insurance premium                            51,935          74,700          90,083
    Occupancy and equipment                                  605,926         623,312         562,354
    Franchise and other taxes                                113,697         118,239         169,144
    Advertising                                              104,860         152,602         240,569
    Other                                                  1,079,354         965,333       1,163,357
                                                        ------------    ------------    ------------
        Total noninterest expense                          3,883,874       3,840,135       4,050,473
                                                        ------------    ------------    ------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       40
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                  CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
                              Years Ended June 30,

<TABLE>
<CAPTION>
                                                                   2001          2000           1999
                                                                   ----          ----           ----
<S>                                                            <C>               <C>           <C>
INCOME (LOSS) BEFORE PROVISION FOR
  INCOME TAXES                                                 (1,307,511)       762,566       (427,592)

PROVISION FOR INCOME TAXES (BENEFIT)                             (429,211)       285,797       (141,017)
                                                              -----------    -----------    -----------

NET INCOME (LOSS)                                             $  (878,300)   $   476,769    $  (286,575)
                                                              ===========    ===========    ===========

COMPREHENSIVE INCOME (LOSS)
    Net income (loss)                                         $  (878,300)   $   476,769    $  (286,575)
    Unrealized gain (loss) on securities, net of tax effect        89,537        (26,748)       (43,263)
                                                              -----------    -----------    -----------
        TOTAL COMPREHENSIVE INCOME (LOSS)                     $  (788,763)   $   450,021    $  (329,838)
                                                              ===========    ===========    ===========
PER SHARE DATA
    Basic earnings (loss) per share                           $   (1.3127)   $     .7944    $    (.4858)
                                                              ===========    ===========    ===========
    Diluted earnings (loss) per share                         $   (1.1222)   $     .7458    $    (.4539)
                                                              ===========    ===========    ===========
    Weighted average common and common
      equivalent shares outstanding                               600,878        600,161        589,963
                                                              ===========    ===========    ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
                                       41
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                              Years Ended June 30,
<TABLE>
<CAPTION>
                                                 Common                                             Unearned
                                                 Stock                  Treasury Stock             MRP Shares
                                          -------------------       ---------------------     --------------------
                                          Shares       Amount       Shares         Amount     Shares        Amount
                                          ------       ------       ------         ------     ------        ------
<S>                                       <C>          <C>          <C>          <C>         <C>            <C>
Balance, June 30, 1998, as restated       677,744    $   6,788      16,800    $(258,551)        --          $     --

For the year ended June 30, 1999:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect                        --           --          --           --         --                --
    Net income (loss)                          --           --          --           --         --                --
    ESOP shares earned                         --           --          --           --         --                --
    Treasury stock sold                        --           --     (11,600)     170,801         --                --
                                          -------    ---------   ---------    ---------      -----          --------

Balance, June 30, 1999                    677,744        6,788       5,200      (87,750)        --                --

For the year ended June 30, 2000:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect                        --           --          --           --         --                --
    Net income (loss)                          --           --          --           --         --                --
    ESOP shares earned                         --           --          --           --         --                --
    Treasury stock reserved for stock
      options                                  --           --      (5,200)      87,750         --                --
    Stock acquired reserved for MRP
      plan                                     --           --          --           --      8,305          (101,638)
    MRP shares issued                         938           --          --           --         --                --
                                          -------    ---------    --------       ------    -------          --------
Balance, June 30, 2000                    678,682        6,788          --           --      8,305          (101,638)

For the year ended June 30, 2001:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect                        --           --          --           --         --                --
    Net income (loss)                          --           --          --           --         --                --
    ESOP shares earned                         --           --          --           --         --                --
    MRP shares issued                         938           --          --           --         --                --
                                          -------    ---------    --------       ------    -------         ---------
Balance, June 30, 2001                    679,620    $   6,788          --       $   --      8,305         $(101,638)
                                          =======    =========    ========    =========    =======         =========
<CAPTION>


                                             Unearned Stock               Unearned ESOP
                                                Options                      Shares
                                        -----------------------       ---------------------           Paid-In
                                        Shares          Amount        Shares         Amount           Capital
                                        ------          ------        ------         ------           -------
<S>                                     <C>            <C>             <C>          <C>               <C>
Balance, June 30, 1998, as restated     15,288         $(240,918)      74,924       $(887,781)        $5,600,821

For the year ended June 30, 1999:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect                     --                --           --              --                 --
    Net income (loss)                       --                --           --              --                 --
    ESOP shares earned                      --                --       (8,325)         98,642            (47,387)
    Treasury stock sold                     --                --           --              --             18,466
                                        ------         ---------       ------       ---------         ----------

Balance, June 30, 1999                  15,288          (240,918)      66,599        (789,139)         5,571,900

For the year ended June 30, 2000:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect                     --                --           --              --                 --
    Net income (loss)                       --                --           --              --                 --
    ESOP shares earned                      --                --       (8,325)         98,642            (35,129)
    Treasury stock reserved for stock
      options                            5,200           (87,750)          --              --                 --
    Stock acquired reserved for MRP
      plan                                  --                --           --              --                 --
    MRP shares issued                       --                --           --              --                 --
                                        ------         ---------       ------       ---------         ----------
Balance, June 30, 2000                  20,488          (328,668)      58,274        (690,497)         5,536,771

For the year ended June 30, 2001:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect
    Net income (loss)                       --                --           --              --                 --
    ESOP shares earned                      --                --           --              --                 --
    MRP shares issued                       --                --       (8,325)         98,642             13,536
                                        ------         ---------       ------       ---------         ----------
Balance, June 30, 2001                  20,488         $(328,668)      49,949       $(591,855)        $5,550,307
                                        ======         =========       ======       =========         ==========
<CAPTION>
                                                            Net
                                                         Unrealized
                                                        Gain (Loss)
                                                         On Available
                                         Retained         For Sale
                                         Earnings         Securities         Total
                                         --------         ----------         -----
<S>                                      <C>              <C>             <C>
Balance, June 30, 1998, as restated     $4,698,346        $ (80,067)     $8,838,638

For the year ended June 30, 1999:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect                         --          (43,263)        (43,263)
    Net income (loss)                     (286,575)              --        (286,575)
    ESOP shares earned                          --               --          51,255
    Treasury stock sold                         --               --         189,267
                                        ----------        ---------      ----------

Balance, June 30, 1999                   4,411,771         (123,330)      8,749,322

For the year ended June 30, 2000:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect                         --          (26,748)        (26,748)
    Net income (loss)                      476,769               --         476,769
    ESOP shares earned                          --               --          63,513
    Treasury stock reserved for stock
      options                                   --               --              --
    Stock acquired reserved for MRP
      plan                                      --               --        (101,638)
    MRP shares issued                           --               --              --
                                        ----------        ---------      ----------
Balance, June 30, 2000                   4,888,540         (150,078)      9,161,218

For the year ended June 30, 2001:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect
    Net income (loss)                           --           89,537          89,537
    ESOP shares earned                    (878,300)              --        (878,300)
    MRP shares issued                           --               --         112,178
                                        ----------        ---------      ----------
Balance, June 30, 2001                  $4,010,240        $ (60,541)     $8,484,633
                                        ==========        =========      ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                       42
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              Years Ended June 30,
<TABLE>
<CAPTION>
                                                                     2001           2000           1999
                                                                     ----           ----           ----
<S>                                                            <C>             <C>             <C>
CASH FLOW FROM OPERATING ACTIVITIES
    Net income (loss)                                          $   (878,300)   $    476,769    $   (286,575)
    Adjustments to reconcile net income (loss) to net
      cash provided by operating activities:
        Depreciation                                                446,197         426,527         344,156
        Amortization and accretion                                   10,622           8,647           8,925
        FHLB stock dividend                                         (70,308)       (118,536)       (122,200)
        Provision for loan losses                                 1,500,128         205,940       1,524,416
        (Gain) loss on sales of investment securities                    --             313         (18,338)
        (Gain) loss on sales of property held for investment         (4,313)        (61,325)        (34,633)
        (Gain) loss on sales of repossessed assets                  100,652          61,169         (23,727)
        Deferred income tax                                          29,983         137,225        (255,433)
        Changes in assets and liabilities:
           Accrued interest receivable                               65,494         124,805          51,151
           Other assets                                            (208,071)       (712,624)          4,370
           Accrued interest payable                                  57,571          55,668        (146,772)
           Other liabilities                                        (40,619)        131,851        (866,524)
                                                               ------------    ------------    ------------
               Net cash provided by (used in) operating
                activities                                        1,009,036         736,429         178,816
                                                               ------------    ------------    ------------

CASH FLOW FROM INVESTING ACTIVITIES
    Proceeds from redemption of capital stock-FHLB                      108       1,000,236              --
    Proceeds on maturities of investment securities               2,000,000              --       1,510,305
    Principal collected on mortgage-backed securities             1,505,729         950,897       1,969,315
    Proceeds on sales of other securities                                --         514,688         126,678
    Principal collected on investment securities called              58,520         148,002       1,546,668
    Purchase of investment securities                              (105,000)       (999,688)     (3,000,000)
    Net (increase) decrease  in loans                            10,068,533         950,758       4,261,559
    Purchases of equipment and improvements                         (25,776)        (84,682)     (1,715,994)
    Refund of deposit on equipment                                   71,380              --              --
    Proceeds from sales of property held for investment             179,018         227,774         538,732
    Purchase of property held for investment                        (69,705)       (618,058)     (1,119,980)
                                                               ------------    ------------    ------------
               Net cash provided by (used in) investing
                activities                                       13,682,807       2,089,927       4,117,283
                                                               ------------    ------------    ------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       43
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                              Years Ended June 30,
<TABLE>
<CAPTION>
                                                                   2001           2000            1999
                                                                   ----           ----            ----
<S>                                                             <C>             <C>             <C>
CASH FLOW FROM FINANCING ACTIVITIES
    Borrowings from FHLB                                        11,000,000      24,000,000      16,000,000
    Repayments to FHLB                                         (16,500,000)    (25,500,000)    (30,000,000)
    Proceeds from other borrowings                               1,616,300              --       1,166,777
    Payments on other notes                                       (167,585)       (197,248)     (1,255,333)
    Net increase (decrease) in deposits                          2,265,821        (827,224)      9,204,285
    Proceeds from sale of treasury stock                                --              --         189,267
    ESOP shares earned                                             112,178          63,513          51,255
    Purchase of unearned MRP shares                                     --        (101,638)             --
                                                               -----------     -----------     -----------
        Net cash provided by (used in) financing activities     (1,673,286)     (2,562,597)     (4,643,749)
                                                              ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                   13,018,557         263,759        (347,650)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                     1,580,568       1,316,809       1,664,459
                                                              ------------    ------------    ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                        $ 14,599,125    $  1,580,568    $  1,316,809
                                                              ============    ============    ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION
    Cash payments for:
        Interest                                              $  6,065,546    $  5,796,258    $  6,452,093
                                                              ============    ============    ============

        Income taxes                                          $         --    $         --    $    200,000
                                                              ============    ============    ============

Loans transferred to foreclosed real estate during the year   $    541,620    $  1,622,548    $    950,871
                                                              ============    ============    ============

Proceeds from sales of foreclosed real estate financed
  through loans                                               $  1,328,976    $    777,553    $    288,262
                                                              ============    ============    ============

Total increase (decrease) in unrealized gain (loss) on
  available for sale securities                               $    (89,537)   $     26,748    $     43,263
                                                              ============    ============    ============
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

                                       44
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         ------------------------------------------

     The  accounting  policies  that  affect  the  significant  elements  of the
financial statements are summarized below:

     NATURE OF OPERATIONS: Cumberland Mountain Bancshares, Inc. (the Company) is
     --------------------
          a holding  company  whose  principal  activity  is the  ownership  and
          management of its wholly-owned  subsidiaries Middlesboro Federal Bank,
          FSB (the  Bank) and Home  Mortgage  Loan  Corporation.  The  Company's
          primary  source  of  income  is from  its  banking  subsidiary,  which
          operates  in  Middlesboro,  Kentucky  with three  branches  located in
          Pineville and Cumberland,  Kentucky and Fountain City, Tennessee.  The
          Bank's primary  source of revenue is derived from net interest  income
          on loans and  investments.  The Bank  operates  under a  Federal  bank
          charter and provides full banking services. As a Federal Savings bank,
          the Bank is subject to regulation by the Office of Thrift  Supervision
          and the Federal Deposit Insurance Corporation.

     BASISOF CONSOLIDATION:  The consolidated  financial  statements include the
     ---------------------
          accounts of Cumberland Mountain Bancshares,  Inc. and its wholly-owned
          subsidiaries  Middlesboro  Federal  Bank,  FSB and Home  Mortgage Loan
          Corporation,   after   elimination   of  all   material   intercompany
          transactions and balances.

     USE  OF ESTIMATES:  The  preparation of financial  statements in conformity
     -----------------
          with generally accepted  accounting  principles requires management to
          make  estimates and  assumptions  that affect the reported  amounts of
          assets  and  liabilities  and  disclosure  of  contingent  assets  and
          liabilities  at the date of the financial  statements and the reported
          amounts of revenues and expenses during the reporting  period.  Actual
          results could differ from those estimates.

          Material  estimates that are  particularly  susceptible to significant
          change  relate to the  determination  of the  allowance  for losses on
          loans and the  valuation of real estate  acquired in  connection  with
          foreclosures  or in  satisfaction  of loans.  In  connection  with the
          determination  of the  allowances  for losses on loans and  foreclosed
          real estate, management obtains independent appraisals for significant
          properties.

          While  management  uses available  information to recognize  losses on
          loans and foreclosed real estate,  future  additions to the allowances
          may be necessary  based on changes in local  economic  conditions.  In
          addition,   regulatory   agencies,   as  an  integral  part  of  their
          examination process,  periodically review the Company's allowances for
          losses on loans and foreclosed real estate.  Such agencies may require
          the Company to recognize  additions to the  allowances  based on their
          judgements  about  information  available to them at the time of their
          examination.  Because of these factors, it is reasonably possible that
          the  allowances  for losses on loans and  foreclosed  real  estate may
          change materially in the near term.

     CASH AND CASH EQUIVALENTS:  For purposes of reporting cash flows,  cash and
     -------------------------
          cash  equivalents  include cash and due from banks,  interest  bearing
          deposits having maturities of ninety days or less with other financial
          institutions, federal funds sold and money market mutual funds.

                                       45
<PAGE>
              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         -----------------------------------------------------

     INVESTMENT SECURITIES:  Investment  securities that are held for short-term
     ---------------------
          resale are classified as trading securities and carried at fair value.
          Debt  securities that management has the ability and intent to hold to
          maturity  are  classified  as held to  maturity  and  carried at cost,
          adjusted for amortization of premiums and accretion of discounts using
          the interest  method.  Other  marketable  securities are classified as
          available  for  sale  and are  carried  at fair  value.  Realized  and
          unrealized gains and losses on trading  securities are included in net
          income.  Unrealized gains and losses on securities  available for sale
          are  recognized  as direct  increases or  decreases  in  stockholders'
          equity.  Cost of  securities  sold is  recognized  using the  specific
          identification method.

     MORTGAGE-BACKED    SECURITIES:    Mortgage-backed    securities   represent
     -----------------------------
          participating  interests in pools of long-term  first  mortgage  loans
          originated and serviced by issuers of the securities.  Mortgage-backed
          securities  are carried at unpaid  principal  balances,  adjusted  for
          unamortized  premiums and unearned  discounts.  Premiums and discounts
          are amortized using the interest  method over the remaining  period to
          contractual maturity, adjusted for anticipated prepayments. Management
          intends  and has the  ability  to hold such  securities  to  maturity.
          Should any be sold,  cost of securities  sold is determined  using the
          specific identification method.

     LOANS: Loans are stated at unpaid  principal  balances,  less the allowance
     -----
          for loan losses and net of deferred loan fees and unearned discounts.

          Unearned  discounts on installment loans are recognized as income over
          the term of the loans using the interest method.

          Loan  origination  and  commitment  fees,  as well as  certain  direct
          origination  costs,  are deferred and amortized as a yield  adjustment
          over  the  lives of the  related  loans  using  the  interest  method.
          Amortization  of  deferred  loan fees is  discontinued  when a loan is
          placed on nonaccrual status.

          Loans are placed on nonaccrual when a loan is specifically  determined
          to be impaired or when  principal or interest is delinquent for ninety
          days or more. Any unpaid interest previously accrued on those loans is
          reversed from income.  Interest income  generally is not recognized on
          specific  impaired  loans  unless the  likelihood  of further  loss is
          remote.  Interest  payments  received  on such loans are  applied as a
          reduction  of the loan  principal  balance.  Interest  income on other
          nonaccrual loans is recognized only to the extent of interest payments
          received.

     ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is maintained at a
     -------------------------
          level which, in management's  judgement,  is adequate to absorb credit
          losses inherent in the loan portfolio.  The amount of the allowance is
          based on  management's  evaluation of the  collectibility  of the loan
          portfolio,   including   the   nature   of   the   portfolio,   credit
          concentrations,   trends  in  historical  loss  experience,   specific
          impaired

                                       46
<PAGE>
              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         -----------------------------------------------------

          loans and  economic  conditions.  Allowances  for  impaired  loans are
          generally  determined based on collateral  values or the present value
          of estimated cash flows. The allowance is increased by a provision for
          loan losses,  which is charged to expense, and reduced by charge-offs,
          net of recoveries.

     ACCOUNTING FOR IMPAIRMENT OF LOANS:  The Company's  measurement of impaired
     ----------------------------------
          loans  includes  those loans  which are  performing  according  to all
          contractual  terms of the  loan  agreement  but may  have  substantive
          indication of potential credit weakness. As of June 30, 2001, $876,000
          of loans were  considered  impaired  by the  Company  and carried on a
          non-accrual  basis. These loans were measured for impairment using the
          fair value of  collateral  or using the present  value of the expected
          future cash flows  discounted at the loan's  effective  rate. If, as a
          result of these measurements, any loans required valuation allowances,
          they were  included  within the overall  allowance  for loan losses at
          June 30, 2001.  Residential  mortgages  and consumer  loans and leases
          outside  the  scope of SFAS No.  114 are  collectively  evaluated  for
          impairment.

     PREMISES AND  EQUIPMENT:  Premises and equipment  are stated at cost,  less
     -----------------------
          accumulated   depreciation   and   amortization.    Depreciation   and
          amortization  are  computed  using the  straight-line  method over the
          estimated  useful lives of the related  assets,  except for  leasehold
          improvements  for which the lesser of the estimated useful life of the
          asset or the  term of the  lease is used.  The  useful  lives  used in
          computing depreciation and amortization are as follows:

                                                               Years
                                                               -----
           Office buildings and improvements                    39
           Furniture, fixtures and equipment                     7
           Leasehold improvements                              5-15

          Gains and  losses on routine  dispositions  are  reflected  in current
          operations. Maintenance, repairs and minor improvements are charged to
          operating  expenses,  and  major  replacements  and  improvements  are
          capitalized.

     OTHERREAL  ESTATE  OWNED:  Other  real  estate  owned  ("OREO")  represents
     ------------------------
          property  acquired through  foreclosure  proceedings held for sale and
          real  estate held for  investment.  OREO is carried at its fair value,
          net of a valuation allowance established to reduce cost to fair value.
          Losses are  charged to the  valuation  allowance  and  recoveries  are
          credited  to the  allowance.  Declines  in market  value and gains and
          losses  on  disposal  are  reflected  in  current  operations  in OREO
          expense. Recoverable costs relating to the development and improvement
          of OREO are  capitalized  whereas routine holding costs are charged to
          expense.  The sales of these  properties  are  dependent  upon various
          market  conditions.  Management is of the opinion that such sales will
          result in net proceeds at least equal to present carrying values.

                                       47
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
        -----------------------------------------------------

     INCOME TAXES:  The Company follows the liability  method which  establishes
     ------------
          deferred  tax assets and  liabilities  for the  temporary  differences
          between  the  financial  reporting  bases  and  the tax  bases  of the
          Company's  assets and  liabilities at enacted tax rates expected to be
          in effect when such amounts are realized or settled.  Net deferred tax
          assets,  whose  realization is dependent on taxable earnings of future
          years,  are recognized when a  more-likely-than-not  criterion is met,
          that is, unless a greater than fifty percent  probability  exists that
          the tax benefits will not actually be realized sometime in the future.

          Effective April 1, 1995, federal regulations  restricted the amount of
          deferred  tax  assets  that  can be used to  meet  regulatory  capital
          requirements  to an amount  that the  institution  expects  to realize
          within one year, or ten percent of Tier 1 capital, whichever is less.

          The Company and its  subsidiaries  file  consolidated tax returns with
          the  federal and state  taxing  authorities.  A tax sharing  agreement
          exists between the Company and the Bank whereby taxes for the Bank are
          computed as if the Bank were a separate entity.  Amounts to be paid or
          credited  with respect to current  taxes are paid to or received  from
          the Company.

     BASIC AND DILUTED EARNINGS  PER SHARE:  Basic  earnings per share of common
     -------------------------------------
          stock is  computed  by  dividing  net  income  (loss) by the  weighted
          average number of shares of common stock and common stock  equivalents
          outstanding  during the period.  Diluted  earnings per share of common
          stock is  computed  by  dividing  net  income  (loss) by the  weighted
          average number of shares of common stock,  management recognition plan
          shares,  ESOP shares and stock options  outstanding and awarded during
          the period.

     ACCRUED COMPENSATED  ABSENCES:  The Company requires all earned vacation to
     -----------------------------
          be taken by their  employees.  There is no liability  for  compensated
          absences reflected in the accompanying financial statements due to the
          immateriality of the accrual.

     STOCK-BASED COMPENSATION PLANS:  Effective in 1996, the Company adopted the
     ------------------------------
          disclosure  option  of  SFAS  No.  123,  "Accounting  for  Stock-Based
          Compensation".  The fair value of each option  granted is valued at an
          amount equal to the market price of the company's stock on the date of
          the grant.

                                       48
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001

NOTE 2 - INVESTMENT SECURITIES

     The carrying value, unrealized gains (losses) and estimated market value of
investment  securities held to maturity and other  investments are summarized as
follows:
<TABLE>
<CAPTION>
                                                     Gross       Gross     Estimated
                                        Amortized  Unrealized  Unrealized   Market
                                          Cost       Gains      Losses      Value
                                          ----       -----      ------      -----
<S>                                     <C>        <C>        <C>        <C>
June 30, 2001
-------------
    Powell Valley National Bank, Inc.   $180,000   $   --     $   --     $180,000
    Municipal bond                       105,000       --         --      105,000
                                        --------   --------   --------   --------
                                        $285,000   $   --     $   --     $285,000
                                        ========   ========   ========   ========
June 30, 2000
-------------
    Powell Valley National Bank, Inc.   $180,000   $   --     $   --     $180,000
                                        ========   ========   ========   ========

June 30, 1999
-------------
    Powell Valley National Bank, Inc.   $180,000   $   --     $   --     $180,000
    Intrieve Corporation                  15,000       --         --       15,000
                                        --------   --------   --------   --------
                                        $195,000   $   --     $   --     $195,000
                                        ========   ========   ========   ========
</TABLE>

   The Company has the intent and ability to hold these securities to maturity.

   The carrying value, unrealized gains (losses) and estimated market value of
investment securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
                                                                 Gross         Gross        Estimated
                                                 Amortized     Unrealized     Unrealized     Market
                                                   Cost          Gains         Losses        Value
                                                   ----          -----         ------        -----
<S>                                            <C>           <C>            <C>            <C>
June 30, 2001
-------------
    U.S. Treasury and government agencies      $   741,096   $     6,949    $    (1,365)   $   746,680
    Franklin U.S. Government Securities Fund     1,000,000          --          (95,942)       904,058
                                               -----------   -----------    -----------    -----------
                                               $ 1,741,096   $     6,949    $   (97,307)   $ 1,650,738
                                               ===========   ===========    ===========    ===========

June 30, 2000
-------------
    U.S. Treasury and government agencies      $ 2,801,023   $      --      $   (64,361)   $ 2,736,662
    Franklin U.S. Government Securities Fund     1,000,000          --         (129,277)       870,723
                                               -----------   -----------    -----------    -----------
                                               $ 3,801,023   $      --      $  (193,638)   $ 3,607,385
                                               ===========   ===========    ===========    ===========
</TABLE>

                                       49
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
         --------------------------------
<TABLE>
<CAPTION>
                                                              Gross         Gross        Estimated
                                             Amortized      Unrealized    Unrealized      Market
                                               Cost           Gains         Losses        Value
                                               ----           -----         ------        -----
<S>                                          <C>           <C>            <C>            <C>
June 30, 1999
-------------
  U.S. Treasury and government agencies      $ 2,451,474   $       687    $   (31,270)   $ 2,420,891

  Franklin U.S. Government Securities Fund     1,000,000            --       (118,610)       881,390
                                             -----------   -----------    -----------    -----------
                                             $ 3,451,474   $       687    $  (149,880)   $ 3,302,281
                                             ===========   ===========    ===========    ===========
</TABLE>

     The gross realized gains,  losses and proceeds on sales of other securities
and investment securities are as follows:
<TABLE>
<CAPTION>
                                      2001              2000              1999
                                      ----              ----              ----
<S>                                 <C>               <C>               <C>
Proceeds                            $       --        $    514,688      $126,678
                                    ==========        ============      ========
Gross realized gains                $       --        $         --      $ 18,338
                                    ==========        ============      ========
Gross realized losses               $       --        $        313      $   --
                                    ==========        ============      ========
</TABLE>

     The amortized cost and estimated market value of investment securities,  by
contractual maturity, are as follows:
<TABLE>
<CAPTION>
                              June 30, 2001             June 30, 2000           June 30, 1999
                              -------------             -------------           -------------
                                       Estimated                Estimated                 Estimated
                         Amortized      Market      Amortized    Market      Amortized     Market
                           Cost         Value         Cost       Value         Cost        Value
                           ----         -----         ----       -----         ----        -----
<S>                    <C>          <C>          <C>          <C>          <C>          <C>
Due in one year
  or less              $   77,660   $   77,660   $       --   $       --   $  500,125   $  500,812
Due after one year
  through five years           --           --    1,500,000    1,457,420    1,500,000    1,476,736
Due after five years
  through ten years       500,000      506,949      999,714      983,160           --           --
Due after ten years       163,436      162,071      301,309      296,082      451,349      443,343
                       ----------   ----------   ----------   ----------   ----------   ----------
                          741,096      746,680    2,801,023    2,736,662    2,451,474    2,420,891
</TABLE>

                                       50
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
         --------------------------------
<TABLE>
<CAPTION>
                         June 30, 2001            June 30, 2000              June 30, 1999
                         -------------            -------------              -------------
                                 Estimated                 Estimated                  Estimated
                    Amortized      Market     Amortized      Market     Amortized       Market
                       Cost        Value        Cost         Value        Cost          Value
                       ----        -----        ----         -----        ----          -----
<S>                  <C>            <C>        <C>            <C>        <C>            <C>
Franklin U.S.
  Government
  Securities Fund    1,000,000      904,058    1,000,000      870,723    1,000,000      881,390
Other investments      285,000      285,000      180,000      180,000      195,000      195,000
                    ----------   ----------   ----------   ----------   ----------   ----------

Total investment
  securities        $2,026,096   $1,935,738   $3,981,023   $3,787,385   $3,646,474   $3,497,281
                    ==========   ==========   ==========   ==========   ==========   ==========
</TABLE>

     There were no issues held at June 30, 2001,  2000 and 1999,  that  exceeded
10% of stockholders' equity.

NOTE 3 - MORTGAGE-BACKED SECURITIES
         --------------------------

     Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
                                                         Gross             Gross           Estimated
                                     Amortized        Unrealized        Unrealized           Market
                                        Cost             Gains            Losses             Value
                                        ----             -----            ------             -----
    <S>                             <C>                <C>              <C>             <C>
    June 30, 2001
    -------------
        GNMA                        $   302,024        $       --       $    (1,215)    $   300,809
        FNMA                            842,426                --              (155)        842,271
                                    -----------        ----------       -----------     -----------
           Total                    $ 1,144,450        $       --       $    (1,370)    $ 1,143,080
                                    ===========        ==========       ===========     ===========
    June 30, 2000
    -------------
        GNMA                        $   359,712        $       --       $    (8,513)    $   351,199
        FNMA                          2,026,860                --           (23,242)      2,003,618
        FHLMC                           272,824                --            (1,998)        270,826
                                    -----------        ----------       -----------     ------------
           Total                    $ 2,659,396        $       --       $   (33,753)    $ 2,625,643
                                    ===========        ==========       ===========     ===========
    June 30, 1999
    -------------
        GNMA                        $   428,563        $       --       $    (3,358)    $   425,205
        FNMA                          2,833,649             3,452           (34,619)      2,802,482
        FHLMC                           354,592                --            (3,146)        351,446
                                    -----------        ----------       -----------     -----------
           Total                    $ 3,616,804        $    3,452       $   (41,123)    $ 3,579,133
                                    ===========        ===========      ===========     ===========
</TABLE>

                                       51
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 3 - MORTGAGE-BACKED SECURITIES (CONTINUED)
         -------------------------------------

     Mortgage-backed  certificates represent participating interests in pools of
long-term  first mortgage loans.  Expected  maturities  differ from  contractual
maturities  because  borrowers  have the  right to  prepay  obligations  without
prepayment penalties.

     The proceeds,  gross realized gains and losses on sales of  mortgage-backed
securities are as follows:
<TABLE>
<CAPTION>
                                       2001          2000              1999
                                       ----          ----              ----
        <S>                         <C>           <C>               <C>
        Proceeds                    $      --     $       --        $       --
                                    ==========    ==========        ==========
        Gross realized gains        $      --             --                --
                                    ==========    ==========        ==========
        Gross realized losses       $      --             --                --
                                    ==========    ==========        ==========
</TABLE>

     At June 30, 2001,  mortgage-backed  securities  with an  amortized  cost of
$3,800,000  and  estimated  market  value of  $3,798,630  were pledged to secure
deposits.

NOTE 4 - LOANS
         -----

     Major  classifications  of loans are  summarized  as  follows  (dollars  in
thousands):
<TABLE>
<CAPTION>
                                    2001         2000         1999
                                    ----         ----         ----
<S>                              <C>          <C>          <C>
Mortgage loans:
   One-to-four family            $  65,592    $  68,479    $  64,825
   Multi-family                        805          879        2,350
   Commercial                       18,313       18,584       18,837
Construction:
   One-to-four family                  898        2,078        4,639
   Multi-family and commercial         551        1,397        1,832
Commercial                           6,737        7,752       10,536
Consumer                             7,034       12,168       12,418
                                 ---------    ---------    ---------
       Total loans                  99,930      111,337      115,437

Less:
   Unearned discounts
                                        (1)          (1)          (1)
   Allowance for loan losses        (1,036)      (1,032)      (1,576)
   Loans in process                    (64)        (694)      (2,248)
                                 ---------    ---------    ---------
       Net loans                 $  98,829    $ 109,610    $ 111,612
                                 =========    =========    =========
</TABLE>

                                       52
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 4 - LOANS (CONTINUED)
         ----------------

     Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
                               2001            2000           1999
                               ----            ----           ----
<S>                          <C>            <C>            <C>
Balance, beginning of year   $ 1,031,805    $ 1,575,761    $   798,069
Provision for loan losses      1,500,128        205,940      1,524,416
Charge-offs                   (1,713,473)    (1,131,142)      (911,209)
Recoveries                       217,252        381,246        164,485
                             -----------    -----------    -----------
Balance, end of year         $ 1,035,712    $ 1,031,805    $ 1,575,761
                             ===========    ===========    ===========
</TABLE>

     Non-accrual loans and their impact on interest income are as follows:
<TABLE>
<CAPTION>
                                                            2001         2000         1999
                                                            ----         ----         ----

<S>                                                      <C>          <C>          <C>
Non-accrual loans                                        $  876,000   $  791,955   $1,528,226
                                                         ==========   ==========   ==========

Impact on interest income:
   Interest income that would have been recorded on
   non-accrual loans in accordance with original terms   $   38,656   $   64,686   $  139,307
                                                         ==========   ==========   ==========

Interest income actually received and recorded during
 the period                                              $    9,847   $    7,295   $   41,349
                                                         ==========   ==========   ==========
</TABLE>

     The  maturities of all loans at June 30, 2001 which have  predetermined  or
floating or adjustable rates follows (amounts in thousands):

        Predetermined Rate:
           1 month - 1 year                                   $       7,332
           1 year - 5 years                                           8,578
           Over 5 years                                              12,055
                                                              -------------
               Total                                          $      27,965
                                                              =============

        Floating or Adjustable Rates:
           1 month - 1 year                                   $       5,378
           1 year - 5 years                                          14,154
           Over 5 years                                              52,433
                                                              -------------
               Total                                          $      71,965
                                                              =============

     The adjustable rate loans have interest rate adjustment limitations tied to
various  indexes.  Future  market  factors  may  affect the  correlation  of the
interest rate adjustment with the rates the Company pays on short-term  deposits
which have primarily been utilized to fund these loans.

                                       53
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 4 - LOANS (CONTINUED)
         ----------------

     The Company is engaged  principally  in providing  first mortgage loans and
accepting  deposits.  Substantially all of the Company's mortgage loan portfolio
at June 30, 2001, 2000 and 1999,  represents  loans to borrowers in Southeastern
Kentucky and  Northeastern  Tennessee.  The Company's policy is to make mortgage
loans that generally do not exceed 80% of the appraised  value of the underlying
property. The Company's loans on nonresidential properties are collateralized by
churches, hospitals and other business properties.

     The  Company  has a  blanket  pledge  to the  Federal  Home  Loan  Bank  of
$7,500,000 of their first mortgages on one-to-four  family  residences to secure
their borrowings.

     Loans made to officers and directors of the Company and their interests are
presented below.
<TABLE>
<CAPTION>
                                          Balance,                                                      Balance,
                                     Beginning of Year         New Loans           Repayments         End of Year
                                     -----------------         ---------           ----------         -----------
         <S>                            <C>                <C>                 <C>                 <C>
         2001                           $ 1,198,389        $      272,164      $      163,878      $   1,306,675
                                        ===========        ==============      ==============      =============
</TABLE>


NOTE 5 - ACCRUED INTEREST RECEIVABLE
         ---------------------------

     Accrued interest receivable is comprised of the following:
<TABLE>
<CAPTION>
                                              2001          2000           1999
                                              ----          ----           ----
<S>                                         <C>           <C>           <C>
Investment securities                       $ 25,791      $ 41,783      $ 44,007
Mortgage-backed securities                     6,424        14,179        18,388
Loans                                        711,580       753,327       871,699
                                            --------      --------      --------
   Total                                    $743,795      $809,289      $934,094
                                            ========      ========      ========
</TABLE>

NOTE 6 - OTHER REAL ESTATE OWNED
         -----------------------

     Federal  banking  regulations  require  the  Company to dispose of all OREO
acquired  through   foreclosure  within  five  years  of  acquisition,   with  a
possibility  for  additional  extensions,  each of up to five years.  Failure to
receive additional extensions could result in losses on OREO.

     Loans converted to OREO through  foreclosure  proceedings totaled $541,620,
$1,622,548  and  $950,871  for the years  ended  June 30,  2001,  2000 and 1999,
respectively.   Sales  of  OREO  that  were  financed  by  the  Company  totaled
$1,328,976,  $777,553 and  $288,262 for the years ended June 30, 2001,  2000 and
1999, respectively.

                                       54
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 7 - PREMISES AND EQUIPMENT
         ----------------------

     Premises and equipment is comprised of the following:
<TABLE>
<CAPTION>
                                             2001          2000          1999
                                             ----          ----          ----
<S>                                       <C>           <C>           <C>
Land                                      $  297,870    $  297,870    $  297,870
Office buildings and improvements          3,224,609     3,224,609     3,221,754
Furniture, fixtures and equipment          2,201,850     2,337,936     2,256,109
                                          ----------    ----------    ----------
   Total premises and equipment            5,724,329     5,860,415     5,775,733
Less accumulated depreciation              1,929,647     1,597,318     1,189,200
                                          ----------    ----------    ----------
   Net premises and equipment             $3,794,682    $4,263,097    $4,586,533
                                          ==========    ==========    ==========
</TABLE>

NOTE 8 - PROPERTY HELD FOR INVESTMENT
         ----------------------------

     Home Mortgage Loan Corporation, an operating subsidiary of the Company, has
acquired  and  developed  property  that is to be  used  for  commercial  rental
property and other properties for future development and/or resale. The value of
these  properties at June 30, 2001 and 2000 and 1999 was $1,540,311,  $1,668,697
and $1,235,497, respectively.

NOTE 9 - DEPOSITS
         --------

     Deposits are summarized as follows:
<TABLE>
<CAPTION>
                                                          Weighted Average
                                                              Rate           Amount        Percent
                                                          ----------------   ------        -------
   <S>                                                          <C>      <C>               <C>
   June 30, 2001
   -------------
        Balance by interest rate:
        Transaction accounts:
          Demand and NOW checking (including
            non-interest bearing deposits of $2,417,944)         1.785%   $   11,941,895    11.02
          Savings                                                2.246%        7,746,946     7.15
          Money market                                           3.343%          567,162      .52
                                                                          --------------   ------
              Total transaction accounts                                      20,256,003    18.69
                                                                          --------------   ------

        Certificates of deposit accounts:
          1.00% - 3.00%                                                          126,568      .12
          3.01% - 5.00%                                                        9,109,915     8.41
          5.01% - 7.00%                                                       78,851,248    72.78
                                                                          --------------   ------
              Total certificates of deposit accounts                          88,087,731    81.31
                                                                          --------------   ------
              Total                                                         $108,343,734   100.00
                                                                          ==============   ======

Weighted average annual interest rate on total deposits                                      3.18
                                                                                           ======
</TABLE>

                                       55
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 9 - DEPOSITS (CONTINUED)
         -------------------
<TABLE>
<CAPTION>
                                                                  Weighted Average
                                                                        Rate         Amount         Percent
                                                                        ----         ------         -------
<S>                                                                      <C>       <C>               <C>
June 30, 2000
-------------
   Balance by interest rate:
       Transaction accounts:
          Demand and NOW checking (including
            non-interest bearing deposits of $2,306,445)                 1.66%     $ 11,800,344      11.12
          Savings                                                        2.25%        7,653,993       7.22
          Money market                                                   3.11%          589,779        .56
                                                                                   ------------     ------
              Total transaction accounts                                             20,044,116      18.90
                                                                                   ------------     ------

       Certificates of deposit accounts:
          1.00% - 3.00%                                                                 155,375        .14
          3.01% - 5.00%                                                               5,676,249       5.35
          5.01% - 7.00%                                                              80,202,173      75.61
                                                                                   ------------     ------
              Total certificates of deposit accounts                                 86,033,797      81.10
                                                                                   ------------     ------
              Total                                                                $106,077,913     100.00
                                                                                   ============     ======

       Weighted average annual interest rate on total deposits                                        3.19
                                                                                                     =====
June 30, 1999
-------------
   Balance by interest rate:
       Transaction accounts:
          Demand and NOW checking (including
            non-interest bearing deposits of $2,301,668)                 1.64%     $ 11,246,158      10.52
          Savings                                                        2.22%        8,838,394       8.27
          Money market                                                   3.73%        1,173,133       1.09
                                                                                   ------------     ------
              Total transaction accounts                                             21,257,685      19.88
                                                                                   ------------     ------

       Certificates of deposit accounts:
          3.01% - 5.00%                                                              19,247,838      18.00
          5.01% - 7.00%                                                              66,399,614      62.12
                                                                                 --------------     ------
              Total certificates of deposit accounts                                 85,647,452      80.12
                                                                                 --------------     ------
              Total                                                                $106,905,137     100.00
                                                                                 ==============     ======

               Weighted average annual interest rate on total deposits                                4.82
                                                                                                    ======
</TABLE>

                                       56
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 9 - DEPOSITS (CONTINUED)
         -------------------

     Remaining  contractual  maturity of certificates of deposit accounts are as
follows:
<TABLE>
<CAPTION>
                                           2001                      2000                        1999
                                           ----                      ----                        ----
<S>                                  <C>               <C>       <C>               <C>       <C>            <C>
        Under one year               $ 58,861,536      66.82%    $ 59,827,081      69.54%    $ 62,729,691   73.24%
        One to three years             24,597,807      27.92       22,882,687      26.60       19,363,440   22.61
        Three to five years             4,628,388       5.26        3,324,029       3.86        3,532,732    4.12
        Five to ten years                      --        .00               --        .00           21,589     .03
        Ten to twenty years                    --        .00               --        .00               --     .00
                                     ------------     ------     ------------     ------     ------------  ------
           Total                     $ 88,087,731     100.00%    $ 86,033,797     100.00%    $ 85,647,452  100.00%
                                     ============     ======     ============     ======     ============  ======
</TABLE>

     The  aggregate  amount  of jumbo  certificates  of  deposit  with a minimum
denomination  of  $100,000  was  approximately   $29,068,841,   $27,850,247  and
$29,381,472 at June 30, 2001, 2000 and 1999, respectively.

     Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>

                                                          2001                2000                1999
                                                          ----                ----                ----
        <S>                                          <C>                  <C>                <C>
        NOW checking and money market                $    208,494         $   234,898        $    224,872
        Savings                                           164,374             179,430             208,343
        Certificates of deposit                         5,040,946           4,619,844           4,722,200
                                                     ------------         -----------         -----------
           Total                                     $  5,413,814         $ 5,034,172         $ 5,155,415
                                                     ============         ===========         ===========
</TABLE>

     The Bank held related party deposits of approximately  $725,000 at June 30,
2001.

NOTE 10 - ADVANCES FROM FHLB
          ------------------

     At June 30, 2001, 2000 and 1999, the Bank has outstanding advances from the
Federal Home Loan Bank of $5,000,000, $10,500,000 and $12,000,000, respectively.
Five million  dollars of advances,  at June 30, 2001, bear interest at a rate of
6.08% and mature March, 2003.

NOTE 11 - NOTES PAYABLE
          -------------

     Notes payable at June 30, are as follows:
<TABLE>
<CAPTION>
                                                                           2001        2000         1999
                                                                           ----        ----         ----
        <S>                                                              <C>          <C>           <C>
        Powell Valley National Bank note; dated May, 1997;
          secured by ESOP shares; due in annual payments of
          $54,362 plus interest at two points over prime rate,
          currently 8.0%; due May, 2007                                   $326,172     $380,534      $434,896
</TABLE>

                                       57
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 11 - NOTES PAYABLE (CONTINUED)
          ------------------------
<TABLE>
<CAPTION>
                                                                  2001         2000        1999
                                                                  ----         ----        ----
<S>                                                             <C>          <C>          <C>
Powell Valley National Bank note; dated June, 1997;
 secured by ESOP shares; due in annual payments of
 $17,097 plus interest at two points over prime rate,
 currently 8.0%; due June, 2007                                 102,584      119,681      136,779
Powell Valley National Bank note; dated June, 1999;
 secured by real estate; due in quarterly payments of
 $29,868 plus interest at one point over prime rate,
 currently 7.0%; due December, 2007                             790,924      880,528    1,000,000
Individual note; dated January, 1999; secured by real
 estate; due in annual payments of $9,800 including
 interest at 5%; due January, 2008                               56,758       63,340       69,658
Commercial Bank note, dated December, 2000; secured by
 100,000 shares of Middlesboro Federal Bank, FSB stock
 due December, 2001                                           1,616,300           --           --
                                                             ----------   ----------   ----------
                                                             $2,892,738   $1,444,083   $1,641,333
                                                             ==========   ==========   ==========
</TABLE>

     Maturities on the notes payable are as follows:

                                 Year             Amount
                                 ----             ------
                                 2002         $ 1,884,065
                                 2003             198,245
                                 2004             198,611
                                 2005             198,994
                                 2006             199,397
                              Thereafter          213,426
                                              -----------
                                              $ 2,892,738
                                              ===========
NOTE 12 - FEDERAL INCOME TAXES
          --------------------

     Income taxes are comprised of the following:
<TABLE>
<CAPTION>
                                                     2001              2000              1999
                                                     ----              ----              ----
        <S>                                     <C>              <C>               <C>
        Current provision                       $  (444,554)     $   148,572       $   114,416
        Deferred benefit                             15,343          137,225          (255,433)
                                                -----------      -----------       -----------
                                                $  (429,211)     $   285,797       $  (141,017)
                                                ===========      ===========       ===========
</TABLE>

                                       58
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 12 - FEDERAL INCOME TAXES (CONTINUED)
          -------------------------------

    Deferred tax assets and liabilities were comprised of the following:
<TABLE>
<CAPTION>
                                                         2001        2000         1999
                                                         ----        ----         ----
<S>                                                   <C>          <C>          <C>
Tax bases over financial bases for loans (loan loss
 reserve and discounts)                               $ 223,172    $ 221,844    $ 341,387
Deferred compensation                                    72,741       74,044       83,471
Retirement plans                                        106,711       34,279       96,241
Depreciation                                           (133,956)    (121,653)    (101,964)
Unrealized gains (losses) on securities                  31,188       77,313       63,534
ESOP/MRP plan                                             6,493       16,630       23,236
                                                      ---------    ---------    ---------
   Net deferred tax asset                             $ 306,349    $ 302,457    $ 505,905
                                                      =========    =========    =========
</TABLE>

     The  Company's  effective  tax  rate  varies  from  the  statutory  rate of
thirty-four percent. The reasons for this difference are as follows:
<TABLE>
<CAPTION>

                                       2001         2000        1999
                                       ----         ----        ----
<S>                                 <C>          <C>          <C>
Computed "expected" tax provision   $(444,554)   $ 148,572    $ 114,416
Increase (reduction) of taxes:
 Tax-exempt income                    (23,917)      40,302       41,678
 Allowance for loan losses              1,328      119,543     (229,434)
 Retirement plans                      15,879      (18,037)      (9,579)
 Deferred compensation                  4,216        6,606      (17,680)
 Depreciation                           5,438       19,689        5,653
 ESOP/MRP plan                          4,602      (28,938)     (44,369)
 Other                                  7,797       (1,940)      (1,702)
                                    ---------    ---------    ---------
      Total                         $(429,211)   $ 285,797    $(141,017)
                                    =========    =========    =========
</TABLE>

NOTE 13 - DIRECTORS' RETIREMENT PLAN
          --------------------------

     The Bank has adopted the  Middlesboro  Federal Bank,  Federal  Savings Bank
Retirement  Plan  for  Directors  (the  "Directors'  Plan")  pursuant  to  which
directors of the Bank are entitled to receive,  upon  retirement,  sixty monthly
payments in the amount of seventy-five  percent of the average monthly fees that
the  respective   director   received  for  service  on  the  Board  during  the
twelve-month period preceding  termination of service on the Board, subject to a
twenty year vesting schedule.  In connection with the adoption of the Directors'
Plan, the Bank incurred an expense of $4,966,  $46,157 and $16,565 for the years
ended June 30, 2001, 2000, and 1999,  respectively.  The liability accrued under
this plan was $170,660,  $196,460 and $185,175 at June 30, 2001, 2000, and 1999,
respectively. The related deferred tax asset was $58,024, $66,796 and $62,959 at
June 30, 2001, 2000, and 1999, respectively.

                                       59
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 14 - EMPLOYMENT AGREEMENT
          --------------------

     In  August,  1996,  the Bank  entered  into an  employment  agreement  (the
"Employment  Agreement")  with Mr. James J. Shoffner (the "Employee") who serves
as its President,  Chief Managing Officer and as a director.  The Board believes
that the  Employment  Agreement  assures  fair  treatment of the Employee in his
career with the Bank by assuring him of some financial security.  Pursuant to an
amendment  to the  Employment  Agreement,  the  Company  will  become  joint and
severally  liable  with  the  Bank  for its  obligations  under  the  employment
agreement.

     The  Employment  Agreement  provides  for a term of three  years,  with the
Employee's annual base salary equal to $55,000.  On each anniversary date of the
commencement of the Employment Agreement,  the term of the Employee's employment
will be extended for an additional  one-year  period  beyond the then  effective
expiration  date,  upon a  determination  by the  Board  of  Directors  that the
performance of the Employee has met the required performance  standards and that
such Employment Agreement should be extended.  The Employment Agreement provides
the Employee  with a salary review by the Board of Directors not less often than
annually, as well as with inclusion in any discretionary bonus plans, retirement
and medical  plans,  customary  fringe  benefits,  vacation and sick leave.  The
Employment  Agreement shall terminate upon the Employee's  death,  may terminate
upon the  Employee's  disability  and is terminable by the Bank for "just cause"
(as defined in the Employment  Agreement).  In the event of termination for just
cause, no severance benefits are available.  If the Bank terminates the Employee
without  just cause,  the  Employee  will be entitled to a  continuation  of his
salary and benefits from the date of  termination  through the remaining term of
the  Employment  Agreement  and at the  Employee's  election,  either  continued
participation  in benefits  plans which the Employee would have been eligible to
participate in through the Employment  Agreement's  expiration  date or the cash
equivalent  thereof.  If  the  Employment  Agreement  is  terminated  due to the
Employee's  "disability" (as defined in the Employment Agreement),  the Employee
will be entitled to a continuation  of his salary and benefits  through the date
of such  termination,  including  any period prior to the  establishment  of the
Employee's  disability.  In the event of the Employee's death during the term of
the  Employment  Agreement,  his estate  will be  entitled to receive his salary
through  the  last day of the  calendar  month in  which  the  Employee's  death
occurred. The Employee is able to voluntarily terminate his Employment Agreement
by providing  ninety days written  notice to the Boards of Directors of the Bank
and the  Company,  in which case the  Employee is  entitled to receive  only his
compensation, vested rights and benefits up to the date of termination.

     In the event of (i) the  Employee's  involuntary  termination of employment
other than for just cause during the period beginning six months before a Change
in Control (as defined) and ending on the later of the first  anniversary of the
Change in  Control  or the  expiration  date of the  Employment  Agreement  (the
"Protected  Period"),  (ii) the Employee's  voluntary  termination within ninety
days  of the  occurrence  of  certain  specified  events  occurring  during  the
Protected Period which have not been consented to by the Employee,  or (iii) the
Employee's  voluntary  termination  of  employment  for any  reason  within  the
thirty-day  period beginning on the date of the Change in Control,  the Employee
will be paid within ten days of such  termination  (or the date of the Change in
Control,  whichever is later) an amount equal to the difference between (i) 2.99
times his "base amount," as defined in Section  28OG(b)(3) of the Code, and (ii)
the sum of any other parachute payments, as

                                       60
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 14 - EMPLOYMENT AGREEMENT (CONTINUED)
          -------------------------------

defined under  Section  28OG(b)(2)  of the Code,  that the Employee  receives on
account  of the  Change  in  Control.  The  Employment  Agreement  with the Bank
provides  that within ten business  days of a Change in Control,  the Bank shall
fund, or cause to be funded,  a trust in the amount of 2.99 times the Employee's
base amount,  that will be used to pay the Employee  amounts owed to him.  These
provisions  may have an  anti-takeover  effect by making it more expensive for a
potential  acquirer  to obtain  control  of the  Company.  In the event that the
Employee prevails over the Company and the Bank, or obtains a written settlement
in a legal dispute as to the Employment Agreement, he will be reimbursed for his
legal and other expenses.

     The  Employment  Agreement  entitles Mr.  Shoffner to receive  supplemental
retirement  benefits  upon his  termination  of  employment  with the Bank,  for
reasons other than removal for just cause.  Benefits are payable for his life in
an annual amount equal to (i) the product of his vested  percentage  (i.e.,  20%
per year of service under the  agreement,  up to 100%) and 80% of the average of
the  highest  compensation  for  three  of the  five  calendar  years  preceding
termination,  less (ii) the sum of the 50% joint and survivor  annuity  value of
his employer provided benefits under the Bank's  tax-qualified  retirement plans
and his annual social  security  benefit at age 62. Vesting  accelerates to 100%
upon his death or disability.  Upon Mr.  Shoffner's  death, his surviving spouse
would receive a lump-sum payment equal to 50% of the present value of his unpaid
retirement benefits.

     At June 30, 2001,  2000 and 1999,  the accrual for the  estimated  benefits
payable under this agreement was $181,391, $139,655 and $97,889, respectively.

NOTE 15 - INCENTIVE COMPENSATION PLAN
          ---------------------------

     Effective  July 1,  1996,  the Bank's  Board of  Directors  implemented  an
incentive  compensation plan (the "Incentive  Compensation Plan"). The Incentive
Compensation  Plan is unfunded and benefits are payable only in the form of cash
from the Bank's general assets. The Incentive  Compensation Plan is administered
by the  Compensation  Committee  (the  "Committee")  consisting  of  the  Bank's
non-employee directors. All employees who are with the Bank on the first and the
last  day  of the  plan  year  are  eligible  to  participate  in the  Incentive
Compensation Plan.

     A mathematical  formula set forth in the Incentive  Compensation  Plan, and
summarized  below,  determines  the  amount of each  participant's  annual  cash
bonuses  ("bonuses").   Nevertheless,   the  Committee  may  in  its  discretion
determine,  by  resolution  adopted  before the first day of any plan  year,  to
change the employees  participating in the Incentive  Compensation Plan, and the
formula for calculating the bonuses.  Absent such action,  for each plan year in
which the Incentive  Compensation  Plan is in effect,  the bonus pool will equal
$35,000  times  the  return-on-average  assets  ("ROAA")  times the  Safety  and
Soundness  Factor  ("SSF")  (which takes into  account the Bank's  nonperforming
assets ("NPA") and its CAMEL  ratings).  ROAA will be calculated  each year on a
consolidated financial basis on a pre-dividend,  pre-provision for loan loss and
pre-plan  payment  basis.  ROAA factor will equal the square of the ratio of (i)
the Bank's return on average assets for the

                                       61
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 15 - INCENTIVE COMPENSATION PLAN (CONTINUED)
          --------------------------------------

plan year to (ii) 0.8%.  The  Committee  may adjust the Company's and the Bank's
ROAA or NPA to take into account  extraordinary  financial events. The aggregate
amount of bonuses payable for any calendar year will be proportionately  reduced
(to zero,  if  necessary) to the extent that the payment would cause the Bank to
cease  to be a  "well-capitalized"  institution  for  the  year.  The  Incentive
Compensation  Plan  provides  that no bonuses will be paid for any year in which
ROAA is less than  0.5%.  Eighty  percent of the bonus  pool is  expected  to be
divided among  employees  based on relative  compensation  amounts and the other
twenty percent based on the Committee's discretion. Directors would be permitted
to make deferral elections with respect to directors' fees, and to have the rate
of return on their deferral be measured by the highest twelve month  certificate
of deposit rate paid by the Bank.

     The Incentive  Compensation  Plan has an indefinite  term, and the Bank has
the right at any time to terminate or amend the Incentive  Compensation Plan for
any reason;  provided,  that no  amendment  or  termination  shall,  without the
consent of a  participant  or, if  applicable,  the  participant's  beneficiary,
adversely  affect such  participant's  or  beneficiary's  rights with respect to
benefits  accrued as of the date of such  amendment  or  termination.  The bonus
accrued was $0,  $14,978 and $9,000 for the years ended June 30, 2001,  2000 and
1999, respectively.

NOTE 16 - DEFERRED COMPENSATION
          ---------------------

     The Bank has an  unfunded  deferred  compensation  agreement  with a former
officer that provides additional benefits upon retirement.  The plan specifies a
benefit of $1,000 per month for fifteen  years from the date of his  retirement,
which was December 31, 1993.  If he does not live to receive all of his deferred
compensation, the unpaid balance at the time of his death shall be forfeited. He
is required to perform  various  future  services  under this  agreement for the
fifteen year term.  A life  insurance  policy has been  purchased on his life to
reimburse  the Bank for the net cost of the  deferred  compensation.  The amount
expensed under this agreement at June 30, 2001, 2000 and 1999, was $12,000.

     The Company specified an annual salary of $52,000 for Mr. Roy Shoffner.  He
has elected to defer  partially this annual salary.  At June 30, 2001,  2000 and
1999, $83,000, $81,000 and $104,000,  respectively,  has been accrued under this
contract  and this  liability  and the  related  deferred  tax asset of $28,220,
$27,540 and $35,360, respectively, are recognized in these financial statements.

     In connection with a deferred  compensation  agreement between the Bank and
another  former  officer,  provision  has been made for the future  compensation
which is payable over the next twenty  years.  At June 30, 2001,  2000 and 1999,
$130,943,  $136,777 and  $141,505,  respectively,  has been  accrued  under this
contract  and this  liability  and the  related  deferred  tax asset of $44,521,
$46,504 and $48,111,  respectively,  are recognized in the financial statements.
The Bank is the owner and  beneficiary  of a life insurance  policy  aggregating
$200,000  on the  life  of this  employee.  The  policy  had an  aggregate  cash
surrender value of $27,884, $21,480 and $14,807 at June 30, 2001, 2000 and 1999,
respectively.

                                       62
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 17 - OFF-BALANCE-SHEET RISK, COMMITMENTS AND CONTINGENCIES
          -----------------------------------------------------

     CONCENTRATION OF CREDIT RISK: The Company's core customer loan  origination
     ----------------------------
          base is located in Southeastern  Kentucky and Northeastern  Tennessee.
          At June 30, 2001,  approximately  eight-five  percent of the Company's
          loan  portfolio was secured by real estate.  Mortgage loans secured by
          one  to  four  family  properties  comprised  approximately  sixty-six
          percent of total mortgage loans at June 30, 2001.

     OFF-BALANCE- SHEET ITEMS:  The Company  enters into  financial  instruments
     -----------------------
          with  off-balance-sheet  risk in the normal course of business to meet
          the financing  needs of its  customers.  These  financial  instruments
          include  commitments  to extend  credit  and  commercial  and  standby
          letters of credit.  These  instruments  involve,  to varying  degrees,
          elements of credit and  interest-rate  risk that are not recognized in
          the accompanying consolidated balance sheets.

          The Company's  exposure to credit loss in the event of  nonperformance
          by the other party to the  financial  instruments  discussed  above is
          represented  by the  contractual  amount  of  those  instruments.  The
          Company  uses the same  credit  policies  in  making  commitments  and
          conditional obligations as it does for on-balance-sheet instruments.

          A summary of financial instruments with off-balance-sheet risk at June
          30, is as follows (in thousands):
<TABLE>
<CAPTION>
                                                                  2001                2000              1999
                                                                  ----                ----              ----
           <S>                                                 <C>                 <C>                <C>
           Commitments to extend credit                        $   300             $   499            $   482
           Unfunded lines of credit                                975               1,542              1,798
           Commercial and standby letters of credit                115                  90                191
                                                               -------             -------            -------
               Total                                           $ 1,390             $ 2,131            $ 2,471
                                                               =======             =======            =======
</TABLE>

          Commitments  to extend credit are  agreements to lend to a customer as
          long as there is no  violation  of any  condition  established  in the
          agreement.  Commitments generally have fixed expiration dates or other
          termination  clauses and may require  payment of a fee.  Since many of
          the  commitments  are expected to expire without being drawn upon, the
          total  commitment  amounts do not  necessarily  represent  future cash
          requirements.  The Company evaluates each customer's  creditworthiness
          on a case-by-case basis. The amount of collateral obtained,  if deemed
          necessary upon extension of credit,  is based on  management's  credit
          evaluation of the counterparty. Collateral held varies but may include
          premises and equipment,  inventory and accounts  receivable.  Unfunded
          lines of credit  represent the undisbursed  portion of lines of credit
          which have been extended to customers.

                                       63
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 17 - OFF-BALANCE-SHEET RISK, COMMITMENTS AND CONTINGENCIES (CONTINUED)
          ----------------------------------------------------------------

          Commercial and standby letters of credit are  conditional  commitments
          issued by the Company to guarantee the  performance of a customer to a
          third party, which typically do not extend beyond one year. The credit
          risk involved in issuing  letters of credit is essentially the same as
          that involved in extending loans to customers.  The Company  typically
          holds   certificates  of  deposit  as  collateral   supporting   those
          commitments, depending on the strength of the borrower.

     DIVIDENDS:  Regulations  limit the amount of dividends  the Bank can pay in
     ---------
          any given year to that year's net income plus retained net income from
          the two preceding years. Additionally, the Bank and the Company cannot
          pay  dividends  which would  cause  either to be  undercapitalized  as
          defined by federal regulations.

     COMMITMENTS:  The Company has entered  into three  noncancelable  operating
     -----------
          leases for branch banking locations.  At June 30, 2001, minimum rental
          commitments based on the remaining  noncancelable  lease terms were as
          follows:

                              Year                    Amount
                              ----                    ------
                              2002                $   81,420
                              2003                    73,020
                              2004                    73,020
                              2005                    73,020
                              2006                    64,340
                           Thereafter                440,000
                                                  ----------
                                                  $  804,820
                                                  ==========

          Total rent  expense for the years ended June 30,  2001,  2000 and 1999
          was $90,897, $91,126 and $89,820, respectively.

     INDEMNIFICATION  AGREEMENTS:  The Bank and the Company  have  entered  into
     ---------------------------
          Indemnification Agreements (the "Indemnification Agreements") with all
          of  the  Bank's  and  the  Company's  directors.  The  Indemnification
          Agreements   provide   for   retroactive   as  well   as   prospective
          indemnification to the fullest extent permitted by law against any and
          all  expenses  (including  attorneys'  fees and all  other  costs  and
          obligations),   judgements,  fines,  penalties  and  amounts  paid  in
          settlement in connection  with any claim or proceeding  arising out of
          the indemnitee's service as a director. The Indemnification Agreements
          also provide for the prompt advancement of expenses to the director in
          connection  with  investigating,  defending  or  being  a  witness  or
          participating  in  any  proceeding.   The  Indemnification  Agreements
          further provide a mechanism  through which the director may seek court
          relief in the event the Company's or the Bank's Board of Directors (or
          other  person  appointed by such Board)  determines  that the director
          would not be permitted to be  indemnified  under  applicable  law. The
          Indemnification  Agreements  impose  on the Bank and the  Company  the
          burden of proving that the director is not entitled to indemnification
          in any

                                       64
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 17 - OFF-BALANCE-SHEET RISK, COMMITMENTS AND CONTINGENCIES (CONTINUED)
          ----------------------------------------------------------------

          particular  case.  If a change in control  (as  defined)  occurs,  the
          director would be entitled to continue on as a director emeritus or as
          an advisory  director  for one year after the change in control,  with
          annual renewal by the Board of Directors of the successor  entity upon
          a duly adopted resolution.

          While not requiring the maintenance of directors' liability insurance,
          the  Indemnification  Agreements  provide that the Bank or the Company
          may obtain such insurance,  if desired.  Further,  the Indemnification
          Agreements  provide  that if the Bank or the  Company  pays a director
          pursuant to an Indemnification Agreement, the Bank or the Company will
          be subrogated to such director's rights to recover from third parties.

     CONTINGENCIES: Home Mortgage Loan Corporation, a subsidiary of the Company,
     -------------
          has guaranteed a note for Allan Edwards,  a developer.  The balance of
          the loan at June 30, 2001 was $529,338.

          The Bank is  involved  in  negotiation  with their  insurance  company
          regarding loans purchased from an outside lender which was found to be
          uncollectible  due to fraud on the part of one of the outside lender's
          employees.  The  amount  due to the Bank of  $668,254,  which  was the
          remaining  principal  amount of the  mortgages  which were found to be
          paid in full, is reflected in other assets.  A reserve of $218,000 has
          been made against the receivable to reflect the estimated recovery.

NOTE 18 - MANAGEMENT RECOGNITION PLAN
          ---------------------------

     The Company established the Management Recognition Plan ("MRP") as a method
to reward and retain  personnel of  experience  and ability in key  positions of
responsibility by providing employees of the Company,  Middlesboro Federal Bank,
F.S.B. and their subsidiaries with a proprietary  interest in the Company,  with
compensation for their past contributions to the Company,  and with an incentive
to make such contributions in the future.

     A  committee  of not  less  than  two  members  of the  Board  who  are the
nonemployee  directors  administer the trust and make awards.  The assets of the
Plan are held in a trust which is  administered  by trustees  designated  by the
Board. Under terms of the plan, the MRP trust may purchase, in the aggregate, up
to a maximum of 17,589 shares of common  stock.  Such shares may be newly issued
shares,  shares held in the treasury,  or shares held in a grantor trust.  As of
August 27, 1998,  awards  covering  7,036  shares of common stock were  granted.
One-third of these plan shares will be vested upon their award, one-third of the
shares will vest when the  participant  completes one year of service  following
the award date and the remaining one-third shares will vest when the participant
completes two years of service following the initial award date.

     Participants will recognize  compensation income when their interest vests.
Generally,  the Company may claim a compensation  expense  deduction at the same
time and same amount as a participant recognizes compensation income. As of June
30, 2001, 1,876 shares have been issued under this plan.

                                       65
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 19 - STOCK OPTION AND INCENTIVE PLANS
          --------------------------------

     The  purpose of the stock  option  and  incentive  plan (the  "Plan") is to
advance the  interests of the Company  through  providing  select  employees and
directors of the Company and its  subsidiaries  with the  opportunity to acquire
shares of common stock. By encouraging such stock  ownership,  the Company seeks
to attract,  retain and motivate the best  available  personnel for positions of
substantial  responsibility and to provide additional incentive to employees and
directors  of the  Company  or any  subsidiary  to  promote  the  success of the
business. The Plan is not qualified under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"),  and is exempt from the provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").

     The  Plan  became  effective  August  18,  1998  (the  "Effective   Date"),
contingent  upon  approval of the  Company's  stockholders.  Such  approval  was
obtained on October 21, 1998.  The Plan is to continue in effect for a period of
ten years from its effective  date,  unless  terminated  earlier by the Board of
Directors (the "Board").  The expiration of the Plan, or its  termination by the
Board, will not affect any awards  previously  granted under the Plan. The Board
may also modify the Plan.

     The Plan is administered by a committee (the  "Committee") of not less than
two (2) members of the Board who are "non-employee directors" within the meaning
of the  federal  securities  laws and who are  appointed  by,  and  serve at the
pleasure of, the Board. A majority of the entire Committee constitutes a quorum,
and the action of a majority  of the  members  present at any meeting at which a
quorum is present,  or acts  approved in writing by a majority of the  Committee
without a meeting, shall be deemed the action of the Committee.

     Subject  to the  express  provisions  of the  Plan  and to any  resolutions
adopted  by the  Board,  the  Committee  has sole  and  complete  authority  and
discretion to select  participants and grant awards under the Plan, to determine
the form and content of awards,  to interpret the Plan, and to prescribe,  amend
and rescind the rules and  regulations  relating to the Plan.  In addition,  the
Committee is authorized  to make all other  determinations  deemed  necessary or
expedient to promote the best interests of the Company with respect to the Plan.
All decisions,  determinations,  and  interpretations of the Committee are final
and conclusive on all persons affected thereby. Members of the Committee will be
indemnified to the extent permissible under the Company's governing  instruments
in  connection  with any claims or other  actions  relating to any action  taken
under the Plan.

     Options  may be either  incentive  stock  options  ("ISOs")  as  defined in
Section 422 of the Code,  or options that are not ISOs  ("Non-ISOs").  Under the
Plan,  the aggregate fair market value of the common stock for which an employee
may be granted ISOs which become first  exercisable in any calendar year may not
exceed  $100,000.  An optionee may purchase  common stock through  exercising an
option and paying the exercise price associated therewith.  Only common stock is
subject to purchase upon exercise of the options. On the effective date, options
covering  32,980 shares of the common stock were granted under the Plan pursuant
to

                                       66
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 19 - STOCK OPTION AND INCENTIVE PLANS (CONTINUED)
          -------------------------------------------

a Plan  provision for automatic  grants on that date.  When one of the directors
retired,  2,199 options expired leaving only 30,781 options  outstanding at June
30, 2001 with an exercise price of $16.00.

     Under the Plan,  the  Committee  determines  the price at which options and
SARs may be exercised,  provided  that the exercise  price for any option or SAR
may not be less than 100% of the fair market value per share of the common stock
on the date such option is granted (110%, in the case of ISOs granted to persons
owning more than 10% of the outstanding common stock).

     Unless the Committee  specifically  eliminates  any vesting  requirement or
imposes a different  vesting schedule in an option  agreement,  each option will
become  exercisable  with  respect  to 33 1/3% of the  optioned  shares  upon an
optionee's  completion  of  each of  three  years  of  service  as an  employee,
director,  or  advisory  or  emeritus  director,  after  the date of the  Award,
provided that an option shall become fully (100%) exercisable  immediately if an
optionee's  continuous  service terminates due to retirement at or after age 65,
death,  or disability (as determined by the  Committee),  as well as immediately
upon a change in control or execution of a written  agreement to effect a change
in control.  The term of options and SARs granted under the Plan may not be more
than ten years from the date of grant (five years in the case of ISOs granted to
an  Optionee  who owns  stock  representing  more than 10% of the  common  stock
outstanding at the time the ISO is granted).

     The Company has 16,065  shares under option  outstanding  from a 1993 stock
option plan. The exercise price ranges from $7.50 to $8.76 per share.

NOTE 20 - EMPLOYEE STOCK OWNERSHIP PLAN
          -----------------------------

     The Company sponsors a leveraged  employee stock ownership plan (ESOP) that
covers all  employees  who work forty or more hours per week.  The Company makes
annual contributions to the ESOP equal to the ESOP's debt service less dividends
received by the ESOP.  All  dividends  received by the ESOP are used to pay debt
service.  The ESOP shares  initially are pledged as collateral  for its debt. As
the debt is repaid,  shares are released from collateral and allocated to active
employees, based on the proportion of debt service paid in the year. The debt of
the ESOP is recorded as debt and the shares  pledged as collateral  are deducted
from   stockholders'   equity  as  unearned  ESOP  shares  in  the  accompanying
consolidated statements of financial condition.

     As shares are released from  collateral,  the Company reports  compensation
expense  equal to the current  market price of the shares and the shares  become
outstanding for  earning-per-share  (EPS)  computations.  Dividends on allocated
ESOP shares are  recorded as a reduction  of  retained  earnings;  dividends  on
unallocated  ESOP  shares  are  recorded  as a  reduction  of debt  and  accrued
interest.  The ESOP compensation expense for the years ended June 30, 2001, 2000
and 1999 was $112,178, $52,031 and $69,722, respectively.

                                       67
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 20 - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
          ----------------------------------------

    Shares of the Company held by the ESOP at June 30 are as follows:
<TABLE>
<CAPTION>
                                                                                     2001          2000            1999
                                                                                     ----          ----            ----
        <S>                                                                         <C>           <C>           <C>
        Allocated shares                                                               8,325         8,325         12,925
                                                                                    ========   ===========       ========

        Shares released for allocation                                                 8,325         8,325          8,325
                                                                                    ========   ===========       =========

        Unreleased (unearned) shares                                                  49,949        58,274         66,599
                                                                                    ========    ==========       ========

        Fair value of unreleased (unearned) shares                                  $699,286      $364,213       $557,767
                                                                                    ========      ========       ========
</TABLE>

NOTE 21 - REGULATORY CAPITAL REQUIREMENT
          ------------------------------

     The Company and the Bank are  required to comply with the capital  adequacy
standards established by the Office of Thrift Supervision (OTS). There are three
basic  measures of capital  adequacy for banks that have been  promulgated;  two
risk-based  measures and a leverage  measure.  All applicable  capital standards
must be satisfied for a bank holding company to be considered in compliance.

     The minimum guidelines for the ratio ("Risk-Based  Capital Ratio") of total
capital   ("Total   Capital")  to   riskweighted   assets   (including   certain
off-balance-sheet  items,  such as standby  letters of credit) is 8.0%. At least
half of Total Capital (i.e., 4.0% of risk-weighted  assets) must comprise common
stock,  minority  interests in the equity account of consolidated  subsidiaries,
noncumulative  perpetual  preferred  stock,  and a limited  amount of cumulative
perpetual  preferred stock,  less goodwill and certain other  intangible  assets
("Tier I  Capital").  The  remainder  may consist of  subordinated  debt,  other
preferred stock, and a limited amount of loan loss reserves ("Tier 2 Capital").

     Failure to meet capital  guidelines  could subject a bank or a bank holding
company to a variety of enforcement  remedies,  including  issuance of a capital
directive,  the  termination of deposit  insurance by the FDIC, a prohibition on
the taking of brokered deposits, and certain other restrictions on its business.
Substantial additional  restrictions can be imposed upon FDIC-insured depository
institutions that fail to meet applicable capital requirements under the federal
prompt corrective action regulations.

     As of June 30,  2001,  2000 and 1999,  the  Company  was  considered  "well
capitalized"  under the federal banking  agencies for prompt  corrective  action
regulations.  The table  which  follows  sets forth the  amounts of capital  and
capital  ratios of the  Company  as of June 30,  and the  applicable  regulatory
minimums (in thousands):

                                       68
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 21 - REGULATORY CAPITAL REQUIREMENT (CONTINUED)
          -----------------------------------------
<TABLE>
<CAPTION>
                                        2001              2000              1999
                                        ----              ----              ----
                                   Amount   Ratio   Amount    Ratio   Amount    Ratio
                                   ------   -----   ------    -----   ------    -----
<S>                               <C>        <C>    <C>        <C>    <C>        <C>
Tangible Capital Requirement:
   Actual                         $ 8,545    6.79   $ 9,311    7.26   $ 8,872    6.82
   Minimum required                 1,887    1.50     1,925    1.50     1,943    1.50
                                  -------   -----   -------   -----   -------   -----
   Excess over minimum            $ 6,658    5.29   $ 7,386    5.76   $ 6,929    5.32
                                  =======   =====   =======   =====   =======   =====

Core Capital Requirement:
   Actual                         $ 8,545    6.79   $ 9,311    7.26   $ 8,872    6.82
   Minimum required                 5,031    4.00     5,132    4.00     5,184    4.00
                                  -------   -----   -------   -----   -------   -----
   Excess over minimum            $ 3,514    2.79   $ 4,179    3.26   $ 3,688    2.82
                                  =======   =====   =======   =====   =======   =====

Risk-Based Capital Requirement:
   Actual                         $ 9,581   11.61   $10,343   11.42   $10,052   10.65
   Minimum required                 6,605    8.00     7,210    8.00     7,521    8.00
                                  -------   -----   -------   -----   -------   -----
   Excess over minimum            $ 2,976    3.61   $ 3,133    3.42   $ 2,531    2.65
                                  =======   =====   =======   =====   =======   =====
</TABLE>

NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS
          -----------------------------------

     Condensed  financial   statements  of  the  Company  (Cumberland   Mountain
Bancshares,  Inc.) are  presented  below.  Amounts  shown as  investment  in the
wholly-owned  subsidiaries  and  equity  in  earnings  of the  subsidiaries  are
eliminated in consolidation.
<TABLE>
<CAPTION>
                        STATEMENTS OF FINANCIAL CONDITION
                        ---------------------------------
                                     ASSETS
                                     ------
                                              2001          2000           1999
                                              ----          ----           ----
<S>                                       <C>           <C>           <C>
Cash                                      $     6,331   $       420   $     4,599
Investment in wholly-owned subsidiaries    11,263,808    10,535,868    10,416,268
Deferred tax                                   21,727        44,170        58,596
Refundable income tax                         287,906       117,256            --
                                          -----------   -----------   -----------
    TOTAL ASSETS                          $11,579,772   $10,697,714   $10,479,463
                                          ===========   ===========   ===========
</TABLE>

                                       69
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
          ----------------------------------------------
<TABLE>
<CAPTION>
                                   LIABILITIES AND STOCKHOLDERS' EQUITY
                                   ------------------------------------
                                                                                   2001          2000             1999
                                                                                   ----          ----             ----
<S>                                                                          <C>             <C>             <C>
Accounts payable and accrued expenses                                        $    259,159    $    155,752    $    158,466
Notes payable                                                                   2,835,980       1,380,744       1,571,675
                                                                             ------------    ------------    ------------
    Total liabilities                                                           3,095,139       1,536,496       1,730,141
                                                                             ------------    ------------    ------------

Common stock                                                                        6,788           6,788           6,788
Treasury stock                                                                         --              --         (87,750)
Unearned MRP shares                                                              (101,638)       (101,638)             --
Unearned stock options                                                           (328,668)       (328,668)       (240,918)
Unearned ESOP shares                                                             (591,855)       (690,497)       (789,139)
Paid-in capital                                                                 5,550,307       5,536,771       5,571,900
Retained earnings                                                               4,010,240       4,888,540       4,411,771
Net unrealized gains (losses) on available
   for sale securities, net of tax effect                                         (60,541)       (150,078)       (123,330)
                                                                             ------------    ------------    ------------
    Total stockholders' equity                                                  8,484,633       9,161,218       8,749,322
                                                                             ------------    ------------    ------------

            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       $ 11,579,772    $ 10,697,714    $ 10,479,463
                                                                             ============    ============    ============

                              STATEMENTS OF INCOME
                              --------------------

INCOME (EXPENSE)
    Investment income                                                        $          1    $         13    $        375
    Gain (loss) on sale of investment securities                                       --              --          18,338
    Equity in undistributed net income (loss) of subsidiaries                    (524,595)        619,350         (55,767)
    Other income                                                                       --         117,256              --
    Interest expense                                                             (236,036)       (132,054)       (128,994)
    Compensation                                                                 (193,172)       (104,531)        (81,484)
    Miscellaneous expenses                                                        (72,705)         (8,839)        (56,132)
    Income tax (expense) benefit                                                  148,207         (14,426)         17,089
                                                                             ------------    ------------    ------------
        Net income (loss)                                                    $   (878,300)   $    476,769    $   (286,575)
                                                                             ============    ============    ============
</TABLE>

                                       70
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
          ----------------------------------------------
<TABLE>
<CAPTION>
                            STATEMENTS OF CASH FLOWS
                            ------------------------

                                                                      2001         2000           1999
                                                                      ----         ----           ----
<S>                                                              <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income (loss)                                            $  (878,300)   $   476,769    $  (286,575)
    Reconciliation of net income to net cash provided by
      operating activities:
        Equity in undistributed net income of subsidiary             524,595       (619,350)        55,767
        Gain (loss) on sale of investment securities                      --             --        (18,338)
        (Increase) decrease in deferred tax                           22,443         14,426        (17,089)
        (Increase) decrease in refundable income tax                (170,650)      (117,256)            --
        Increase (decrease) in accounts payable and accrued
         expenses                                                    103,407         (2,714)      (564,909)
                                                                 -----------    -----------    -----------
           Net cash provided by (used in) operating activities      (398,505)      (248,125)      (831,144)
                                                                 -----------    -----------    -----------

CASH FLOWS FROM INVESTING ACTIVITIES
    Sales of investment securities                                        --             --        145,144
                                                                 -----------    -----------    -----------
           Net cash provided by (used in) investing activities            --             --        145,144
                                                                 -----------    -----------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES
    Dividends received (paid) subsidiary                          (1,163,000)       473,000        125,000
    Payments on borrowings                                          (161,062)      (190,929)       (68,894)
    Proceeds from borrowing                                        1,616,300             --             --
    Proceeds from sale of treasury stock                                  --             --        189,267
    ESOP shares earned                                               112,178         63,513         51,255
    Purchase of shares for MRP plan                                       --       (101,638)            --
                                                                 -----------    -----------    -----------
        Net cash provided by (used in) financing activities          404,416        243,946        296,628
                                                                 -----------    -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                          5,911         (4,179)      (389,372)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                             420          4,599        393,971
                                                                 -----------    -----------    -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                           $     6,331    $       420    $     4,599
                                                                 ===========    ===========    ===========
</TABLE>

                                       71
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 23 - EMPLOYEE BENEFIT PLANS
          ----------------------

     On July 1, 1995,  a 401(K)  plan was  adopted  covering  substantially  all
employees.   Each  employee  of  the  Bank  automatically  becomes  eligible  to
participate  in the plan on the July 1  immediately  following the date on which
such employee attains the age of eighteen and completes one year of service.

     Employees'  before-tax  contributions  are  limited  based on  restrictions
established by the Internal  Revenue  Service.  In each plan year, the Bank will
make matching  contributions to each account equal to twenty-five percent of the
employees' elective  contributions.  Employees are one hundred percent vested at
all  times  in  their  contributions  and  regular  matching  contributions.  In
addition,  the  401(K)  arrangement  plan  permits  the  Bank  to  contribute  a
discretionary  amount to all of the  participants  for any plan year,  and those
contributions  will  be  allocated  among  the  participants  based  upon  their
respective  shares of the total  compensation  paid  during the plan year to all
participants  eligible.  The Bank's  contributions  for the years ended June 30,
2001, 2000 and 1999 were $13,012, $12,542 and $12,921, respectively.

NOTE 24 - LOAN SERVICING
          --------------

     The Bank sold  $2,783,000 of loans and retained  servicing  rights  ranging
from .125% to .25%.  There was no servicing asset or liability  recorded because
the  Bank  estimated  that the  benefits  of  servicing  are  just  adequate  to
compensate  for its servicing  responsibilities.  Servicing  income for June 30,
2001, 2000 and 1999 was $422, $5,817, and $13,000, respectively.

NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS
          -----------------------------------

     Generally,  the  Company's  practice  and  intent is to hold its  financial
instruments to maturity,  unless otherwise designated.  Where available,  quoted
market prices are used to determine fair value.  However,  many of the Company's
financial  instruments  lack  quoted  market  prices.  Although  the Company has
incorporated  what it considers to be appropriate  estimation  methodologies for
those  financial  instruments  which lack quoted  market  prices,  a significant
number of assumptions  must be used in  determining  such estimated fair values.
Such assumptions  include  subjective  assessments of current market conditions,
perceived risks  associated with these financial  instruments and other factors.
Different  assumptions  might  be  considered  by  the  user  of  the  financial
statements to be more  appropriate,  and the use of  alternative  assumptions or
estimation  methodologies  could  have a  significant  effect  on the  resulting
estimated fair values.  The estimated fair value presented  neither includes nor
gives effect to the values  associated  with the  Company's  business,  existing
customer relationships, and branch banking network, among other things.


                                       72
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
          ----------------------------------------------

     The following estimates of the fair value of certain financial  instruments
held  by  the  Company  includes  only  instruments  that  could  reasonably  be
evaluated. The investment securities portfolio was evaluated using market quotes
as of June 30, 2001.  The fair value of the loan  portfolio was evaluated  using
market quotes for similar  financial  instruments,  where available.  Otherwise,
discounted cash flows, after adjusting for credit deterioration, were used based
upon  current  rates the Company  would use in  extending  credit  with  similar
characteristics.  These  rates may not  necessarily  be the same as those  which
might be used by other financial  institutions for similar loans.  Cash and cash
equivalents are valued at cost. The fair values disclosed for checking accounts,
savings accounts, and certain money market accounts are, by definition, equal to
the  amount  payable  on demand at the  reporting  date,  i.e.,  their  carrying
amounts.  Fair values for time  deposits are estimated  using a discounted  cash
flow  calculation  that applies  current  interest rates to aggregated  expected
maturities.  Standby  letters of credit and  commitments  to extend  credit were
valued at book value as the majority of these  instruments are based on variable
rates.

     These  evaluations  may  incorporate  specific  value  to  the  Company  in
accordance with its  asset/liability  strategies,  interest rate projections and
business  plans  at  a  specific  point  in  time,  and  therefore,  should  not
necessarily  be viewed as  liquidation  value.  They  should also not be used in
determining  overall  value of the Company  due to  undisclosed  and  intangible
aspects such as business and franchise  value, and due to changes to assumptions
of interest rates and expected cash flows which might need to be made to reflect
expectations of returns to be earned on instruments with higher credit risks.

     The table  below  illustrates  the  estimated  fair value of the  Company's
financial  instruments as of June 30, using the assumptions  described above (in
thousands):
<TABLE>
<CAPTION>
                                             2001        2000       1999
                                             ----        ----       ----
        <S>                                <C>        <C>        <C>
        Cash and cash equivalents          $ 14,599   $  1,581   $  1,317
                                           ========   ========   ========
        Investment securities              $  3,079   $  6,413   $  7,076
                                           ========   ========   ========
        Loans                              $ 98,829   $ 93,697   $101,483
                                           ========   ========   ========
        Deposits                           $108,343   $104,699   $106,423
                                           ========   ========   ========
        Advances from FHLB                 $  5,000   $ 10,500   $ 12,000
                                           ========   ========   ========
        Notes payable                      $  2,893   $  1,495   $  1,641
                                           ========   ========   ========
        Standby letters of credit          $    115   $     90   $    191
                                           ========   ========   ========
        Commitments to extend credit and
           unfunded lines of credit        $  1,275   $  2,041   $  2,280
                                           ========   ========   ========
</TABLE>

                                       73
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2001


NOTE 26 - RECLASSIFICATIONS
          -----------------

     There have been some  reclassifications of amounts within the stockholders'
equity for the year ended June 30, 1999 to properly reflect stock option shares,
treasury shares and unearned ESOP shares.

NOTE 27 - RESTATEMENT
          -----------

     The Company's  financial  statements  have been restated for June 30, 1998,
1999 and 2000 to reflect  correction of an error  regarding  computations of the
Company's ESOP  compensation.  The effect on net income (loss) for June 30, 2000
and 1999 was a $27,796 and $68,386 increase,  respectively.  The effect on total
capital for June 30, 1998 was a $59,337 increase which is reflected in beginning
capital at July 1, 1999.

NOTE 28 - SUBSEQUENT EVENTS
          -----------------

     A letter of intent has been signed with Commercial Bancgroup, Inc. for them
to acquire Cumberland  Mountain  Bancshares,  Inc. for $9.520 million in cash in
exchange for all of their  outstanding  shares.  The  agreement  provides for an
adjustment to this  purchase  price if certain  financial  covenants are not met
prior to closing.  The  proposed  exchange  is subject to final  approval of all
regulatory  authorities and the shareholders of Cumberland Mountain  Bancshares,
Inc.

                                       74
<PAGE>

ITEM  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------

     Not applicable.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT
--------------------------------------------------------------------------------

     The  following  table  sets  forth the name of each  member of the Board of
Directors,  along with his age as of June 30,  2001,  the year he first became a
director of the Bank and the expiration of his current term as a director of the
Company.  All of the Company's  current  directors were  initially  appointed as
directors  of the  Company  in 1996 in  connection  with the  incorporation  and
organization  of the Company,  except for Barry Litton who was  appointed to the
Board of  Directors  in November  1997.  Each  director of the Company also is a
member  of the Board of  Directors  of the Bank.  There are no  arrangements  or
understandings between the Company and any director or nominee pursuant to which
such  person has been  selected  as a director  or nominee  for  director of the
Company,  and,  except for J. Roy Shoffner and James J.  Shoffner who are father
and son,  no  director,  nominee  or  executive  officer is related to any other
director, nominee or executive officer by blood, marriage or adoption.
<TABLE>
<CAPTION>
                                                                      YEAR FIRST
                                                                      ELECTED AS              CURRENT
                                             AGE AS OF                 DIRECTOR                TERM
NAME                                       JUNE 30, 2001              OF THE BANK            TO EXPIRE
----                                       -------------              -----------            ---------
<S>                                             <C>                      <C>                   <C>
Reecie Stagnolia, Jr.                           65                       1993                  2001
Raymond C. Walker                               71                       1985                  2001
Barry Litton                                    50                       1997                  2002
James J. Shoffner                               40                       1988                  2002
J. Roy Shoffner                                 73                       1961                  2003
</TABLE>
     Presented  below is certain  information  concerning the directors.  Unless
otherwise stated,  all directors have held the positions  indicated for at least
the past five years.

     REECIE  STAGNOLIA,  JR. is currently  Vice President and the Branch Manager
and Loan Officer at the  Cumberland  Branch  (Tri-City  Office),  of the Bank, a
position  he has held since 1989.  He  previously  worked for the Harlan  County
Board of Education as a teacher,  Assistant  Principal and Principal,  Assistant
Superintendent and Superintendent  from 1962 to 1988. Mr. Stagnolia is currently
a member of the Board of Directors of the Center for Rural  Development,  Harlan
County  Airport,  Kentucky  Coal Mine  Museum,  Tri-City  Chamber  of  Commerce,
Cumberland  Lions Club,  Sleepy  Hollow  Country  Club,  Inc.,  and  Chairman of
Cumberland Tourism Board.

     RAYMOND C.  WALKER  served as  president  of the Mutual  Holding  Company's
subsidiary,  Home Loan Mortgage Corporation from October, 1991 to October, 1996.
He worked for the Middlesboro  Daily News as Advertising  Director for 24 years,
worked at National  Bank as Business  Development  Director  for seven years and
served  five  years as manager of 120 units of the  Section 8  Federally  Funded
Housing.  Mr.  Walker served as mayor of the city of  Middlesboro  and served as
Vice President and Treasurer of the Bank.

     BARRY LITTON is currently  Vice Chairman of the Board.  Mr. Litton owns and
manages Litton's Market, a restaurant located in Knoxville, Tennessee.

     JAMES J. SHOFFNER joined Middlesboro  Federal in 1994 as Vice President and
Chief Operating Officer and became President and Chief Managing Officer in March
1996.  He also  serves  as  President  of the  Company.  He also has  served  as
President of Home Mortgage  Loan  Corporation  since 1996.  Prior to joining the
Bank as a full-time  officer,  Mr.  Shoffner is the President of JRS  Restaurant
Corporation.  He  graduated  from  Middlesboro  High  School  and  attended  the
University  of  Kentucky.  He  is a  Deacon  in  the  First  Baptist  Church  of
Middlesboro.  Mr.

                                       75
<PAGE>
Shoffner is a member of the  Middlesboro  Kiwanis  Club and a member of the Bell
County  Industrial  Commission.  He has  served  on the  Board of  Directors  of
Middlesboro  Federal  since  June 6,  1988.  Mr.  Shoffner  is the son of J. Roy
Shoffner.

     J. ROY  SHOFFNER is  currently  Chairman  of the Board and Chief  Executive
Officer of the Company and of Middlesboro  Federal, a position he has held since
1994. He is a graduate of Lincoln  Memorial  University and a veteran USAF pilot
of four years.  Mr. Shoffner owns and operates  Shoffner  Realty,  a real estate
development  company and also owns JRS Restaurant  Corporation.  Mr. Shoffner is
the past owner of a local  plastic pipe  manufacturing  company and is active in
real  estate and  business  properties.  Mr.  Shoffner is the father of James J.
Shoffner.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

     The following sets forth information  including their ages as of the Record
Date with respect to  executive  officers of the Company who do not serve on the
Board of Directors.  Executive  officers are appointed  annually by the Board of
Directors.

     J. D. HOWARD,  age 40,  joined the Bank in July 1996 as Vice  President and
was  appointed  Chief  Financial  Officer in October  1996 and named Senior Vice
President in July 1999. He also serves as  Secretary/Treasurer  for the Company.
Prior to joining the Bank,  Mr.  Howard was an internal  auditor and  compliance
officer at Home Federal of Middlesboro for two years. Prior to that he was Chief
Financial  Officer of First  Federal  Savings Bank,  Pineville,  Kentucky for 11
years.

     DIANA J. MIRACLE, age 39, joined the Bank as a compliance officer in August
1995, was named Vice President and Chief  Operating  Officer in October 1996 and
was named  Senior  Vice  President  in July 1999.  Prior to that  time,  she was
employed at Security First Network Bank in Pineville, Kentucky for 11 years. Ms.
Miracle  currently  serves a three-year  term as a director of the Young Bankers
Division of the Kentucky Bankers Association.

     BETTY  HALSEY,  age 51, has been Senior Vice  President  and Chief  Lending
Officer of the Bank since July 1999,  Prior to joining the Bank,  Ms. Halsey was
Chief  Executive  Officer and  President at Community  Trust Bank's  Middlesboro
office since June 1995. Prior to 1995, Ms. Halsey was Chief Executive Officer of
Commercial Bank, Middlesboro, since 1994. Prior to that she was Senior Lender at
Commercial  Bank.  Ms.  Halsey is a member of the  Middlesboro  Kiwanis Club and
Financial Women International.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Pursuant to regulations  promulgated  under the Exchange Act, the Company's
officers, directors and persons who own more than ten percent of the outstanding
Common Stock are required to file reports  detailing their ownership and changes
of ownership in such Common Stock, and to furnish the Company with copies of all
such reports.  Based on the  Company's  review of such reports which the Company
received  during the last  fiscal  year,  or written  representations  from such
persons that no annual  report of change in  beneficial  ownership was required,
the Company  believes that,  during the last fiscal year, all persons subject to
such reporting requirements have complied with the reporting requirements.


                                       76
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION
--------------------------------

     SUMMARY  COMPENSATION  TABLE.  The following  table sets forth the cash and
noncash  compensation  for each of the last  three  fiscal  years  awarded to or
earned by the Chief Executive Officer. No other executive officer of the Company
earned a salary  and bonus  during  fiscal  year  2001  exceeding  $100,000  for
services rendered in all capacities to the Bank.
<TABLE>
<CAPTION>
                                                                                LONG-TERM COMPENSATION
                                                                                ------------------------
                                                     ANNUAL COMPENSATION                AWARDS
                                            ----------------------------------  ------------------------
                                                                                RESTRICTED   SECURITIES
                                 FISCAL                           OTHER ANNUAL   STOCK       UNDERLYING      ALL OTHER
NAME                             YEAR       SALARY       BONUS    COMPENSATION  AWARD(S)      OPTIONS     COMPENSATION(1)
----                             ----       ------       -----    ------------  --------    ----------   ---------------
<S>                              <C>       <C>         <C>          <C>         <C>          <C>            <C>
James J. Shoffner
President and Chief Executive    2001      $ 100,000   $  1,500     $   --      $    --      $    --        $13,200
   Officer                       2000        100,000      1,500         --           --           --         13,200
                                 1999        100,000      1,500         --       35,351 (2)   10,993         13,200
<FN>
_____________
(1)  Consists  of  director's  fees  and  the  value  of  stock  awarded  to Mr.
     Shoffner's account in the ESOP.
(2)  As of June 30, 2001,  Mr.  Shoffner held 4,221 shares of restricted  Common
     Stock awarded under the MRP. Such shares had an aggregate  value of $56,772
     based on the last known sale price of $13.45 per share.
</FN>
</TABLE>

     OPTION  YEAR-END VALUE TABLE.  The following  table sets forth  information
concerning the value of options held by the Chief Executive  Officer at June 30,
2001.
<TABLE>
<CAPTION>
                                           NUMBER OF SECURITIES                 VALUE OF UNEXERCISED
                                         UNDERLYING UNEXERCISED                 IN-THE-MONEY OPTIONS
                                        OPTIONS AT FISCAL YEAR-END              AT FISCAL YEAR-END (1)
                                        ----------------------------         --------------------------
NAME                                    EXERCISABLE   UNEXERCISABLE          EXERCISABLE  UNEXERCISABLE
----                                    -----------   --------------         -----------  -------------
<S>                                        <C>            <C>                <C>            <C>
James J. Shoffner                          11,516         --                 $3,112         $    --

<FN>
___________
(1)      Based on aggregate fair market value of the shares of Common Stock
         underlying the options at June 30, 2001 less aggregate exercise price.
         For purposes of this calculation, the fair market value of the Common
         Stock at June 30, 2001 is assumed to be equal to the last known sale
         price of $13.45 per share. Of the 11,516 options held by Mr. Shoffner,
         523 options were granted at an adjusted exercise price of $7.50 per
         share, and 10,993 options were granted at an exercise price of $16.000.
</FN>
</TABLE>
     DIRECTOR  FEES.  The members of the Board of Directors  receive  $1,100 for
regular  monthly Board meetings and committee  meetings  attended.  The Chairman
receives  $1,500  monthly for regularly  scheduled  Board meetings and committee
meetings.  The Vice Chairman  receives $1,200 for regular monthly board meetings
attended.

     Pursuant to the  Cumberland  Mountain  Bancshares,  Inc.  Stock  Option and
Incentive  Plan (the  "Option  Plan"),  non-employee  directors  of the  Company
received  automatic  grants of stock options in fiscal year 1999.  Each director
who was not an  employee  on the  effective  date of the  Option  Plan  received
options to purchase  2,198 shares of Common Stock at an exercise  price equal to
the fair market  value of the Common  Stock on the date of grant  ($16.00).  All
such options will expire on October 21, 2008.  Directors who are also  employees
are  eligible  for awards  under the Option  Plan as well.  During  fiscal  1999
Director  James J.  Shoffner  received  a grant  of  10,993  options  also at an
exercise of $16.00 and subject to a three year vesting schedule.

     DIRECTOR  RETIREMENT  PLAN.  The Bank has adopted the  Middlesboro  Federal
Bank, Federal Savings Bank Retirement Plan for Directors (the "Directors' Plan")
pursuant  to  which  directors  of  the  Bank  are  entitled  to  receive,  upon
retirement, 60 monthly payments in the amount of 75% of the average monthly fees
that the  respective  director  received  for  service  on the Board  during the
12-month period preceding  termination of service on the Board,  subject to a 20
year vesting  schedule.  In connection with the adoption of the Directors' Plan,
the Bank incurred an expense of $169,061 which was recognized  during the fiscal
year 1997.

                                       77
<PAGE>
     In fiscal year 1997, the Bank's Board  converted the Directors' Plan from a
defined  benefit  type  of  plan  to a  defined  contribution  type.  Under  the
Directors' Plan, as amended, a bookkeeping account in each participants' name is
credited,  on an annual  basis  with an amount  equal to the sum of the  accrual
attributable to the participant  equal to the investment return which would have
resulted if such  deferred  amounts had been  invested in either Common Stock or
the Bank's highest annual rate of interest on  certificates  of deposit having a
one-year term.

     Each  participant's  account has been  credited with an amount equal to the
present  value of the  benefits  in which  the  participant  has a fully  vested
interest  before  its  amendment.  This  amount  was  determined  based  on  the
participant's  years of service and 75% of average fees paid to directors in the
year prior to the participant's retirement. In addition, beginning July 1, 1996,
each  participant's  account is  credited  with  $1,516 for each year of service
until a maximum of 20 years worth of credits is reached,  including past service
credits.  Benefits are payable from the Bank's general assets, although the Bank
may establish a grantor trust that will purchase  Common Stock that will be held
to help the Bank meet its liabilities associated with the Directors' Plan.

     Upon a "Change in Control" the present value of each participant's benefits
will become payable in one lump-sum payment within ten days. "Change in Control"
generally  refers to (a) any "person" (as the term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the  "beneficial  owner" (as defined in
Rule 13d-3  promulgated  under the Exchange  Act),  directly or  indirectly,  of
securities of the Bank or the Company  representing twenty percent (20%) or more
of the  combined  voting  power  of the  Bank's  or  the  Company's  outstanding
securities  except  for any  securities  of the  Bank  purchased  by the  Bank's
employee stock  ownership plan and trust;  or (b) individuals who constitute the
Board of the Bank or the board of  directors  of the  Company on the date hereof
("Incumbent  Board")  cease for any  reason to  constitute  at least a  majority
thereof;  provided  that any person  becoming a director  subsequent to the date
          --------
hereof whose election was approved by a vote of at least  three-quarters  of the
directors  comprising the Incumbent  Board, or whose  nomination for election by
the Company's stockholders was approved by the same nominating committee serving
under an Incumbent Board, shall be, for purposes of this clause (b),  considered
as though he were a member of the Incumbent  Board;  or (c) the  occurrence of a
plan of reorganization,  merger, consolidation, sale of all or substantially all
the assets of the Bank or the Company or similar  transaction  in which the Bank
or the Company is not the resulting  entity.  A Change in Control will not occur
as the result of  acquisitions  of Common  Stock by Messrs.  J. Roy Shoffner and
James J. Shoffner.


                                       78
<PAGE>
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

     (a)  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     The following table provides you with  information  regarding  ownership of
Cumberland  Common Stock by any person or group Cumberland knows to beneficially
own more than 5% of its outstanding  Common Stock.  The information is as of the
Record Date.  Information about persons or groups who own beneficially more than
5% of  Cumberland  Common  Stock is based on  filings  with the  Securities  and
Exchange Commission on or before the Record Date.
<TABLE>
<CAPTION>
                                                         AMOUNT AND                PERCENT OF
                                                          NATURE OF                 SHARES OF
                                                         BENEFICIAL               COMMON STOCK
NAME                                                     OWNERSHIP(1)             OUTSTANDING(2)
----                                                     ----------               ------------
<S>                                                      <C>                         <C>
Cumberland Mountain Bancshares, Inc.
Employee Stock Ownership Plan Trust
1431 Cumberland Avenue
Middlesboro, Kentucky  40965                              37,900 (3)                  12.23%

Jeffrey L. Gendell                                        67,116                       9.87%
Tontine Management, L.L.C.
Tontine Financial Partners, L.P.
Tontine Overseas Associates, L.L.C.
200 Park Avenue, Suite 3900
New York, New York 10166

Sandler O'Neill Asset Management, LLC                     65,000                       9.56%
Malta Partners, L.P.
Malta Hedge Fund, L.P.
Malta Partners II, L.P.
Malta Hedge Fund II, L.P.
SOAM Holdings, LLC
Terry Maltese
712 Fifth Avenue
22nd Floor
New York, New York  10019

James J. Shoffner                                         70,161                      10.15%
1431 Cumberland Avenue
Middlesboro, Kentucky 40961
<FN>
____________
(1)  A person is  considered  the  beneficial  owner of any shares of Cumberland
     Common  Stock (1) over which he or she has or shares  voting or  investment
     power,  or (2) of  which  he or she has the  right  to  acquire  beneficial
     ownership at any time within 60 days from the Record Date.  "Voting  power"
     is the power to vote or direct the voting of shares and "investment  power"
     is the power to dispose or direct the disposition of shares.
(2)  In  calculating  percentage  ownership  for a given  individual or group of
     individuals,  the number of shares of Cumberland  Common Stock  outstanding
     includes unissued shares subject to options  exercisable  within 60 days of
     the Record Date held by that  individual or group.
(3)  Includes  29,575  shares  which  have been  allocated  to the  accounts  of
     participants.  The ESOP trustees  vote all  allocated  shares in accordance
     with  instructions of the participants;  unallocated  shares and shares for
     which no  instructions  have been received  generally are voted by the ESOP
     trustees in the same ratio as  participants  direct the voting of allocated
     shares or, in the absence of such direction, as directed by Cumberland.
</FN>
</TABLE>


                                       79
<PAGE>
     (b)  SECURITY OWNERSHIP OF MANAGEMENT

     The following table provides you with  information  regarding  ownership of
Cumberland Common Stock by directors and executive officers.  The information is
as of September 18, 2001.
<TABLE>
<CAPTION>
                                                         AMOUNT AND                PERCENT OF
                                                          NATURE OF                 SHARES OF
                                                         BENEFICIAL               COMMON STOCK
NAME                                                     OWNERSHIP(1)             OUTSTANDING(2)
----                                                     ----------               ------------
<S>                                                       <C>                         <C>
James J. Shoffner                                         70,161                      10.15%
J. Roy Shoffner                                           13,894                       2.03
Reecie Stagnolia, Jr.                                     17,849                       2.54
Raymond C. Walker                                         15,668                       2.29
Barry Litton                                               3,665                       0.54
All directors and executive
  officers as a group (8 persons)                        139,299 (3)                  19.39%
<FN>
_______________
(1)  A person is  considered  the  beneficial  owner of any shares of Cumberland
     Common  Stock (1) over which he or she has or shares  voting or  investment
     power,  or (2) of  which  he or she has the  right  to  acquire  beneficial
     ownership at any time within 60 days from the Record Date.  "Voting  power"
     is the power to vote or direct the voting of shares and "investment  power"
     is the power to dispose or direct the disposition of shares.
(2)  In  calculating  percentage  ownership  for a given  individual or group of
     individuals,  the number of shares of Cumberland  Common Stock  outstanding
     includes unissued shares subject to options  exercisable  within 60 days of
     the Record Date held by that individual or group.
(3)  Includes  35,792 shares which all  directors  and  executive  officers as a
     group had a right to  purchase  pursuant to the  exercise of stock  options
     exercisable within 60 days of the Record Date.
</FN>
</TABLE>
     (c)  CHANGES IN CONTROL

     The Company is party to an Agreement and Plan of Share Exchange, as amended
with  Commercial  Bancgroup,  Inc.  pursuant to which  Commercial  has agreed to
acquire all of the issued and outstanding  shares of the Company in exchange for
an aggregate of $9.52 million.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

     During the fiscal year ended June 30, 2001,  certain loans made by the Bank
were  outstanding  in an amount  exceeding  $60,000  to  certain  directors  and
executive  officers and associates of directors and executive  officers.  All of
such  loans  were  made  in the  ordinary  course  of  business,  were  made  on
substantially the same terms, including interest rates and collateral,  as those
prevailing at the time for comparable  transactions with other persons,  and did
not  involve  more than the  normal  risk of  collectibility  or  present  other
unfavorable features.

ITEM 13.  EXHIBITS LIST AND REPORTS ON FORM 8-K
-----------------------------------------------

          (a)  List of Documents Filed as Part of This Report
               ----------------------------------------------

               (1)  Consolidated  Financial Statements.  The following financial
                    ----------------------------------
                    statements of the registrant are included  herein under Item
                    7.

                    Independent Auditor's Report

                    (a)  Consolidated  Statements  of Financial  Condition as of
                         June 30, 2001, 2000 and 1999
                    (b)  Consolidated  Statements  of Income for the Years Ended
                         June 30, 2001, 2000 and 1999

                                       80
<PAGE>
                    (c)  Consolidated Statements of Stockholders' Equity for the
                         Years Ended June 30, 2001, 2000 and 1999
                    (d)  Consolidated  Statements  of Cash  Flows  for the Years
                         Ended June 30, 2001, 2000 and 1999
                    (e)  Notes to Consolidated Financial Statements

               (2)  Financial Statement Schedules. None
                    -----------------------------

               (3)  Exhibits. The following exhibits are either filed as part of
                    --------
                    this Annual Report on Form 10-KSB or incorporated  herein by
                    reference:

               Exhibit No.

               3.1      Charter of Cumberland Mountain Bancshares, Inc. *

               3.2      Bylaws of Cumberland Mountain Bancshares, Inc. *

               10.1     Employment  Agreement between  Middlesboro Federal Bank,
                        Federal Savings Bank and James J. Shoffner and
                        amendment * +

               10.2     Middlesboro Federal Bank, FSB 1993 Stock Option Plan * +

               10.3     Middlesboro  Federal  Bank,  FSB 1993  Management
                        Recognition  and  Retention  Plan (As Amended and
                        Restated) *+

               10.4     Middlesboro  Federal  Bank,  Federal  Savings  Bank
                        Retirement Plan for  Non-Employee Directors * +

               10.5     Middlesboro Federal Bank, FSB Incentive Compensation
                        Plan *+

               10.6     Form of indemnification agreements with directors *

               10.7     Cumberland Mountain Bancshares, Inc. 1998 Stock Option
                        and Incentive Plan + *

               10.8     Cumberland Mountain Bancshares, Inc. Management
                        Recognition Plan + *

               21       Subsidiaries of Registrant

               23       Consent of Marr, Miller & Myers, PSC
_____________
*    Incorporated  by reference from  Registration  Statement on Form SB-2 filed
     February 5, 1997 (File No. 333-18665)
+    Management  contract or  compensatory  plan or  arrangement  required to be
     filed as an exhibit to this Form.

     (b)  Reports on Form 8-K.  No  current  reports on Form 8-K have been filed
          -------------------
          during the last quarter of the fiscal year covered by this report.



                                       81
<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                      CUMBERLAND MOUNTAIN BANCSHARES, INC.


Date:  September 27, 2001             By:/s/ James J. Shoffner
                                         ---------------------------------------
                                         James J. Shoffner
                                         President and Chief Executive Officer
                                         (Duly Authorized Officer)

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.


By: /s/ J. Roy Shoffner                      By: /s/ Reecie Stagnolia, Jr.
    -----------------------------                -------------------------------
       J. Roy Shoffner                           Reecie Stagnolia, Jr.
       Chairman of the Board                     Director

Date:  September 27, 2001                        Date:  September 27, 2001


By: /s/ James J. Shoffner                    By: /s/ Raymond C. Walker
    -----------------------------                -------------------------------
       James J. Shoffner                         Raymond C. Walker
      President and Director                     Director
      (Chief Executive Officer)

Date:  September 27, 2001                        Date:  September 27, 2001


By: /s/ J. D. Howard                         By:
    -----------------------------                -------------------------------
       J. D. Howard                              Barry Litton
       Vice President                            Director
       (Chief Financial and Accounting Officer)

Date:  September 27, 2001                        Date:  September __, 2001